UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2011March 31, 2012

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                        

Commission file number: 1-13165

CRYOLIFE, INC.

(Exact name of registrant as specified in its charter)

(770) 419-3355

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                                 No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                                 No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                         No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Part I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying Notes to Summary Consolidated Financial Statements.

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CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

See accompanying Notes to Summary Consolidated Financial Statements.

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CRYOLIFE, INC. AND SUBSIDIARIES

SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

See accompanying Notes to Summary Consolidated Financial Statements.

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CRYOLIFE, INC. AND SUBSIDIARIES

NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  Basis of Presentation

The accompanying summary consolidated financial statements include the accounts of CryoLife, Inc. and its subsidiaries (“CryoLife,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Summary Consolidated Balance Sheet as of December 31, 20102011 has been derived from audited financial statements. The accompanying unaudited summary consolidated financial statements as of and for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such statements do not include all of the information and disclosures required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.2012. These summary consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in CryoLife’s Annual Report on Form 10-K for the year ended December 31, 2010.2011.

2.  Financial Instruments

The Company’s financial instruments include cash equivalents, marketable securities, restricted securities, accounts receivable, and accounts payable. The Company typically values 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.

The Company records certain financial instruments at fair value, including: cash equivalents, certain marketable securities, and certain restricted securities. These financial instruments are discussed in further detail in the notes below. The Company may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-instrument basis, although as of September 30, 2011March 31, 2012 the Company has not chosen to make any such elections. Fair value financial instruments are recorded in accordance with the 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:

The determination of fair value and the assessment of a measurement’s placement within the hierarchy require judgment. Although the Company believes that the recorded fair values of its financial instruments are appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

The following is a summary of the Company’s financial instruments measured at fair value (in thousands):

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The Company uses prices quoted from its investment management companies to determine the level 2 valuation of its investments in money market funds and securities.

The Company also measures certain non-financial assets at fair value on a non-recurring basis when applying accounting for business combinations or when asset impairments are recorded. The Company uses the fair value hierarchy to value these assets and reports these fair values in the periods in which they are recorded or written down. During the year ended December 31, 2011 the Company initially recorded certain non-financial assets at fair value related to the acquisition of Cardiogenesis Corporation (“Cardiogenesis”). Refer to the discussion of the inputs and methods used in the non-recurring valuation of the Company’s assets

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acquired from Cardiogenesis in Note 5. No non-financial assets were measured at fair value on a non-recurring basis after initial recognition in the Company’s Summary Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011.

3.  Cash Equivalents and Restricted Securities

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

As of September 30, 2011March 31, 2012 and December 31, 2010 $313,0002011 $318,000 and $309,000,$312,000, respectively, of the Company’s money market funds were designated as short-term restricted securities due to a contractual commitment to hold the securities as pledged collateral relating to international tax obligations. As of September 30,March 31, 2012 and December 31, 2011 $5.0 million of the Company’s money market funds and as of December 31, 2010 $5.0 million of the Company’s U.S. Treasury debt securities were designated as long-term restricted securities due to a financial covenant requirement under the Company’s credit agreement with General Electric Capital Corporation (“GE Capital”) as discussed in Note 11. The restriction on the Company’s money market funds lapses upon expiration of the credit agreement with GE Capital on October 28, 2014.

There were no material realized gains or losses on cash equivalents in the ninethree months ended September 30, 2011March 31, 2012 and 2010. At September 30, 20112011. As of March 31, 2012 $5.0 million of restricted securities had ano maturity date, within three months and $313,000$318,000 of restricted securities had a maturity date of between three months and one year. As of December 31, 2010 $5.32011 $5.0 million of the Company’s restricted securities had no maturity date, and $312,000 of restricted securities had a maturity date within three months.

4.  Investment in ValveXchange

In July 2011 the Company purchased approximately 2.4 million shares of series A preferred stock of ValveXchange, Inc. (“ValveXchange”) for approximately $3.5 million. ValveXchange is a private medical device company that was spun off from Cleveland Clinic to develop a lifetime heart valve replacement technology platform featuring exchangeable bioprosthetic leaflets. The Company’s carrying value of this investment includes the purchase price and certain transaction costs.costs, and CryoLife’s investment represents an approximate 19% equity ownership in ValveXchange. As ValveXchange’s stock is not actively traded on any public stock exchange and as the Company’s investment is in preferred stock, the Company accounted for this investment using the cost method. The Company recorded its investment as a long-term asset, investment in equity securities, on the Company’s Summary Consolidated Balance Sheet.Sheets.

The Company will evaluate the carrying value of the ValveXchange preferred stock investment if factors become known that indicate an impairment review is warranted. If the Company subsequently determines that the value of its ValveXchange stock has been impaired, or if the Company decides to sell its ValveXchange preferred stock for less than the carrying value, the resulting impairment charge or realized loss on sale of the investment in ValveXchange could be material. During the quarter ended March 31, 2012 the Company reviewed available information and determined that no factors were present indicating that the Company should evaluate its investment in ValveXchange preferred stock for impairment.

Loan Agreement

In July 2011 the Company entered into an agreement with ValveXchange to make available up to $2.0 million to ValveXchange in debt financing through a revolving credit facility (“ValveXchange Loan”). The ValveXchange Loan includes various affirmative

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and negative covenants, including financial covenant requirements, and expires on July 30, 2018, unless terminated earlier. Amounts

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loaned under the ValveXchange Loan will earn interest at an 8% annual rate and arewill be secured by substantially all of the tangible and intangible assets of ValveXchange. The Company incurred loan origination costs, net of fees charged to ValveXchange, of approximately $117,000, which will be expensed on a straight-line basis over the life of the loan facility. The Company will record advances to ValveXchange as long-term notes receivable. As of September 30, 2011March 31, 2012 there were no outstanding receivable balances under the ValveXchange Loan, and the remaining availability was $2.0 million.

Option Agreement

Concurrently with the ValveXchange Loan described above, CryoLife entered into an option agreement with ValveXchange through which CryoLife obtained the right of first refusal to acquire ValveXchange during a period that extends through the completion of initial commercialization milestones and the right to negotiate with ValveXchange for European distribution rights.

5.  Cardiogenesis Acquisition

Overview

On May 17, 2011 CryoLife completed its acquisition of all of the outstanding shares of Cardiogenesis Corporation (“Cardiogenesis”) for $0.457 per share or approximately $21.7 million. CryoLife used cash on hand to fund the transaction and operates Cardiogenesis as a wholly owned subsidiary.

Cardiogenesis is a leading developer of surgical products used in the treatment of patients with refractorysevere angina resulting from diffuse coronary artery disease. Cardiogenesis markets its revascularization technologies, which include the Cardiogenesis Transmyocardial Revascularization (“TMR”) Holmium Laser System, which includes the holmium:Holmium: YAG laser console and single use, fiber-optic handpieces, whichhandpieces. These products are U.S. Food and Drug Administration (“FDA”) approved for performing a surgical procedure known as TMR,Transmyocardial Revascularization, used for treating patients with stable angina that is not responsive to standard medications. Patients undergoing TMR treatment with Cardiogenesis products have been shown to have angina reduction, longer event-free survival, reduction in cardiac related hospitalizations, and increased exercise tolerance.conventional therapy.

Accounting for the Transaction

The Company has recorded a preliminaryan allocation of the $21.7 million purchase price to Cardiogenesis’ tangible and identifiable intangible assets acquired and liabilities assumed based on their acquisition date fair values as of May 17, 2011. Goodwill has been recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired.values. The preliminary purchase price allocation is as follows (in thousands):

The preliminary allocation of the purchase price to intangible assets iswas based on valuations performed to determine the fair value of such assets as of the acquisition date. Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired. The Company may adjustliability amounts recorded included the Company’s estimate of contingent liabilities assumed. The purchase price allocation was finalized as of December 31, 2011.

The accuracy of the amounts recorded as of September 30, 2011was based on information available to reflect any revised evaluationsthe Company through December 31, 2011. If the value of the assets acquired or liabilities assumed.assumed by the Company is determined to be significantly different from the amounts previously recorded in purchase accounting, the Company might need to record additional expenses or write-downs in future periods.

CryoLife incurred approximately $3.0 million in transaction and integration costs related to the acquisition in the nine monthsyear ended September 30,December 31, 2011. The Company does not expect to continue to incur significant transaction or integration costs in 2012.

Pro FormaLegal Action

Cardiogenesis’ revenues of $3.3 million fromAs previously reported, in 2008 CardioFocus, Inc. (“CardioFocus”) filed a complaint in the date of acquisitionU.S. District Court for the secondDistrict of Massachusetts (“Massachusetts Court”) against Cardiogenesis and third quartersa number of 2011 are includedother companies. In the complaint, CardioFocus alleges that Cardiogenesis and the other defendants had previously violated patent rights allegedly held by CardioFocus directed to the use of holmium-doped YAG lasers in connection with low-hydroxyl content silica fibers for use in performing surgery. All of the asserted patents have now expired, and the Company is the sole remaining defendant in the Summary Consolidated Statementaction. CardioFocus seeks as damages a reasonable royalty pursuant to the Georgia Pacific factors for Cardiogenesis’ sales of Operations. Selected unaudited pro forma resultsits accused products, namely, the SolarGen, TMR, and New Star lasers and lasers systems, during the period 2002 to 2007.

Since the filing of operationsthe lawsuit in February 2008, Cardiogenesis has filed numerous requests for reexamination of the nine months endedtwo remaining patents being asserted against Cardiogenesis with the U.S. Patent and Trademark Office (“USPTO”). Through these reexaminations three asserted claims from two patents have survived. Specifically, Claim 2 of U.S. Patent No. 6,547,780 (the “‘780 Patent”) and Claims 2 and 7 of U.S. Patent No. 5,843,073 (the “‘073 Patent”) were confirmed by the USPTO. Notwithstanding the confirmation of the asserted claims, CryoLife and Cardiogenesis believe that significant issues concerning the validity, enforceability, and non-infringement of the asserted patents continue to exist. As a result, in late 2011 and early 2012

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September 30,Cardiogenesis petitioned the USPTO to reconsider its denial of Cardiogenesis’ additional reexamination requests for three claims of the two patents in question that CardioFocus alleges Cardiogenesis infringes. The USPTO has not ruled on these petitions.

On August 15, 2011 at the request of both parties, the Massachusetts Court lifted a stay that had been in effect because of prior USPTO reexaminations of the asserted patents and 2010, assumingentered a Scheduling Order. Pursuant to the Scheduling Order, a claims construction hearing or so-called “Markman Hearing” occurred on October 21, 2011. On November 3, 2011 the Massachusetts Court issued a claim construction ruling that construed certain claim terms in favor of CardioFocus’ position. On November 14, 2011 Cardiogenesis acquisition hadfiled a motion for reconsideration of the Massachusetts Court’s construction of certain claim terms.

Discovery in the matter is now complete. In March 2012 both parties filed certain motions for summary judgment with the Massachusetts Court. CardioFocus filed a motion for summary judgment precluding Cardiogenesis’ equitable defenses of laches, estoppel, acquiescence, ratification, unclean hands and/or waiver, and a motion for summary judgment of no inequitable conduct. Cardiogenesis filed motions for summary judgment of invalidity based on obviousness, laches, and for non-infringement. On April 19, 2012 the Massachusetts Court granted CardioFocus’ summary judgment motions and denied Cardiogenesis’ summary judgment motions. In addition, the Massachusetts Court denied Cardiogenesis’ motion to reconsider the Massachusetts Court’s earlier Markman ruling that occurred on November 3, 2011.

Based on these rulings, Cardiogenesis’ defenses at trial, which is scheduled to begin June 18, 2012, are limited. Cardiogenesis’ primary defenses at trial will be that it did not infringe the three claims contained in the ‘780 Patent and ‘073 Patent, and that the claims in these two patents are obvious and invalid. In the event that Cardiogenesis is found by a jury to have infringed any of the three claims contained in the ‘780 Patent and ‘073 Patent, the jury will also have to determine the amount of damages based on the Georgia Pacific factors. Based on management’s analysis of the expert damages reports submitted by the two parties, the Company believes that the appropriate range for damages if Cardiogenesis is found to infringe the CardioFocus patents is between $933,000 and $5.0 million, before prejudgment interest is calculated. CardioFocus has stated that it believes its damages are $10.0 million. Cardiogenesis intends to defend itself vigorously in this action. At this time, neither CryoLife nor Cardiogenesis is able to predict the outcome of this matter; however, management believes that based on the Massachusetts Court’s most recent rulings on April 19, 2012 that it is appropriate for CryoLife to reserve to the low end of the range of damages of $933,000 as there is no best estimate due to the uncertainty of January 1a trial. Because of each respective period,the uncertainty of how the Court will rule on the pre-trial motions regarding evidence that will be allowed to be presented at trial and the fact that a jury will ultimately hear this matter and make the final determination, it is highly uncertain as to what the ultimate result of the trial will be. In the event that it is determined that Cardiogenesis infringed CardioFocus’ patents and the damages to be awarded are presented for comparative purposes below (in thousands, except per share amounts):materially higher than the Company’s reserve of $933,000, this matter will have a material adverse effect on CryoLife’s financial condition, profitability, and cash flows.

6.  PerClot^® Technology Acquisition

Pro forma results for the nine months ended September 30, 2011 include Cardiogenesis acquisition and integration related costs of approximately $3.0 million, on a pre-tax basis. Pro forma disclosures were calculated using a tax rate of approximately 36%.

Overview

On September 28, 2010 CryoLife entered into a worldwide distribution agreement (the “Distribution Agreement”) and a license and manufacturing agreement (the “License Agreement”) with Starch Medical, Inc. (“SMI”) of San Jose, California for PerClot,^®, a polysaccharide hemostatic agent used in surgery. PerClot is an absorbable powderpowdered hemostat that has CE Mark designation allowing commercial distribution into the European Community and other markets. It is indicated for use in surgical procedures, including cardiac, vascular, orthopaedic, spinal, neurological, gynecological, ENT, and trauma surgery, as an adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. Under the terms of the agreements, CryoLife received the worldwide rights, subject to certain exclusions, to commercialize PerClot for all approved surgical indications and a license to manufacture the PerClot product, subject to certain exclusions.product. CryoLife also received an assignment of the PerClot trademark from SMI as part of the terms of the agreements.

The Distribution Agreement contains certain minimum purchase requirements and has a term of 15 years. CryoLife may begin manufacturing PerClot under the terms of the License Agreement, which extends for an indefinite period. Upon FDA approval, the Company may terminate such minimum purchase requirements. Following the start of manufacturing and U.S. regulatory approval, CryoLife may terminate the Distribution Agreement and sell PerClot pursuant to the License Agreement. CryoLife will pay royalties to SMI at stated rates on net revenues of products manufactured under the License Agreement. In addition to allowing CryoLife to manufacture PerClot, the License Agreement granted CryoLife a three-year option to purchase certain remaining related technology from SMI, which the Company exercised in September 2011. The Company’s Distribution Agreement with SMI contains minimum purchase requirements for PerClot through the end of the contract term. Upon FDA approval, the Company may terminate such minimum purchase requirements.

As part of the initial transaction, CryoLife paid SMI $6.75 million in cash, which included $1.5 million in cash for prepaid royalties, and approximately 209,000 shares of restricted CryoLife common stock. CryoLife made an additional contingent

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payment of $250,000 in 2011 and will pay additional contingent amounts of up to $2.5 million to SMI if certain FDA regulatory and other commercial milestones are achieved.

Accounting for the Transaction

CryoLife accounted for the agreements discussed above as an asset acquisition. The initial consideration aggregated approximately $8.0 million, including: $6.75 million in cash, restricted common stock valued at approximately $1.0 million, and direct transaction costs. CryoLife recorded a non-current asset for the $1.5 million in prepaid royalties, recorded a deferred tax asset of $145,000, and allocated the remaining consideration to the individual intangible assets acquired based on their relative fair values as determined by a valuation study. As a result, CryoLife recorded intangible assets of $327,000 for the PerClot trademark, $2.6 million for the PerClot distribution and manufacturing rights in certain international countries, and $3.5 million for the PerClot distribution and manufacturing rights in the U.S. and certain other countries which do not have current regulatory approvals. This $3.5 million was considered in-process research and development, as it is dependent upon regulatory approvals which have not yet been obtained. Therefore, CryoLife expensed the $3.5 million as in-process research and development upon acquisition in the third quarter of 2010. The PerClot trademark acquired by the Company has an indefinite useful life; therefore, that asset will not be amortized, but will instead be subject to annual impairment testing. The $2.6 million intangible asset will be amortized over its useful life of 15 years. See additional disclosures in Note 9 below.

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CryoLife expects to record future contingent payment amounts of up to $2.5 million initially as research and development expense or, after FDA approval or issuance of a patent, as acquired intangible assets. As of September 30,In the year ended December 31, 2011 CryoLife recorded research and development expenses of $250,000 for the contractual milestone payment due to SMI upon filing of the Investigational Device Exemption.

The common stock issued to SMI will be held by CryoLife until March 31, 2012, when the restricted provisions of the stock lapse.investigational device exemption.

Starch Technology Purchase

On September 2, 2011 CryoLife entered into an additional license agreement with SMI to purchase the technology to produce and use modified starch, the key component for manufacturing PerClot, for $1.0 million plus transaction related expenses. The Company recorded the technology purchased as an intangible asset which will be amortized over its useful life of 14 years.

7.  Medafor Matters

Overview

CryoLife began distributing HemoStase in 2008 for Medafor, Inc. (“Medafor”) under an Exclusive Distribution Agreement (“EDA”). In November 2009 and in 2010 the Company executed stock purchase agreements to purchase a total of approximately 2.4 million shares of common stock in Medafor for $4.9 million. The Company’s carrying value of this investment included the purchase price and adjustments to record certain of the stock purchase agreements’ embedded derivative liabilities at the fair market value on the purchase date, as discussed further below. As Medafor’s common stock is not actively traded on any public stock exchange, asbecause Medafor is a non-reporting company for which financial information is not readily available, and as the Company does not exert significant influence over the operations of Medafor, the Company accounted for this investment using the cost method and recorded it as the long-term asset, investment in equity securities, on the Company’s Summary Consolidated Balance Sheets.

HemoStase Inventory

Based on Medafor’s final termination of the EDA in late September 2010, the Company performed a review of its HemoStase inventory to determine if the carrying value of the inventory had been impaired. At the time of the termination, CryoLife expected to continue to sell HemoStase for a six-month period following the final termination of the EDA. As a result, the Companyand determined that the carrying value was impaired. As a result CryoLife wrote down the value of the HemoStase inventory was impaired and increased its cost of products by $1.6 million to write down related finished goodsthis inventory in the third quarter of 2010. After the write-down as of September 30, 2010, the Company believed that the remaining $1.7 million of HemoStase inventory was recoverable over the six-month selling period following the termination of the EDA. The amount of this write-down reflected management’s estimate based on information available at that time. As of September 30, 2011 and December 31, 2010 the Company had zero and $559,000, respectively, in remaining value of HemoStase inventory on its Summary Consolidated Balance Sheets.

The Company was able to sell more HemoStase than it originally estimated and that had previously been written down; therefore, cost of products in the first nine monthsquarter of 2011 was favorably impacted by approximately $330,000. As of March 31, 2012 and December 31, 2011 the Company had zero in remaining value of HemoStase inventory on its Summary Consolidated Balance Sheets.

Investment in Medafor Common Stock

During the quarter ended September 30, 2010, the Company reviewed available information to determine if factors indicated that a decrease in value of the investment in Medafor common stock had occurred. CryoLife determined that the available information, particularly Medafor’s termination of its largest distributor, indicated that the Company should evaluate its investment in Medafor common stock for impairment.

CryoLife used a market based approach for the valuation, including comparing Medafor to a variety of comparable publicly traded companies, recent merger targets, and company groups. CryoLife considered both qualitative and quantitative factors that could affect the valuation of Medafor’s common stock. Based on its analysis, the Company believed that its investment in Medafor was impaired and that this impairment was other than temporary. Therefore, in the third quarter of 2010 CryoLife recorded a non-operating expense, other than temporary investment impairment, of $3.6 million to write down its investment in Medafor common stock to $2.6 million. During the nine months ended September 30, 2011,March 31, 2012 the Company reviewed available information and determined that no factors were present indicating that the Company should evaluate the carrying value of its investment in Medafor

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common stock for further impairment. The carrying value of the Company’s 2.4 million shares of Medafor common stock was approximately $2.6 million as of both September 30, 2011March 31, 2012 and December 31, 2010.2011.

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The Company will continue to evaluate the carrying value of this investment if changes to the factors discussed above or additional factors become known that indicate the Company should evaluate its investment in Medafor common stock for further impairment. If the Company subsequently determines that the value of its Medafor common stock has been impaired, further, or if the Company decides to sell its Medafor common stock for less than the carrying value, the resulting impairment charge or realized loss on sale of the investment in Medafor could be material.

Medafor Derivative

Per the terms of certain of the stock purchase agreements for the Medafor shares discussed above, in the event that CryoLife acquires more than 50% of the diluted outstanding stock of Medafor or merges with Medafor within a three-year period from each respective agreement date (a “Triggering Event”), CryoLife is required to make a future per share payment (the “Purchase Price Make-Whole Payment”) to such sellers. The payment would be equal to the difference between an amount calculated using the average cost of any subsequent shares purchased, as defined in each respective agreement, and the price of the shares purchased pursuant to each applicable stock purchase agreement. The Company was required to account for these Purchase Price Make-Whole Payment provisions as embedded derivatives (collectively the “Medafor Derivative”).

CryoLife performed a valuation of the Medafor Derivative using a Black-Scholes model to estimate the future value of the shares on the purchase date. Management’s assumptions as to the likelihood of a Triggering Event occurring coupled with the valuation of the Purchase Price Make-Whole Payment were then used to calculate the derivative liability. The fair value of the Medafor Derivative was initially recorded as an increase to the investment in equity securities and a corresponding derivative liability on the Company’s Summary Consolidated Balance Sheets. The Medafor Derivative was revalued quarterly, and any change in the value

As of the derivative subsequent to the purchase date was recorded in the Company’s Summary Consolidated Statements of Operations.

During the quarter ended March 31, 2010, the Company’s estimate of the likelihood of a Triggering Event decreased significantly, largely due to the Company withdrawing its offer to purchase Medafor. As of September 30, 20112012 and December 31, 20102011 the Company believed that the likelihood of a Triggering Event was remote.

Theremote and the value of the Medafor Derivative was zero as of both September 30, 2011 and December 31, 2010. The change in the value of the derivative recorded on the Summary Consolidated Statements of Operations was zero and a gain of $143,000 for the three months ended September 30, 2011 and 2010, respectively, and zero and a gain of $1.3 million for the nine months ended September 30, 2011 and 2010, respectively.zero.

Legal Action

As previously reported, CryoLife filed a lawsuit against Medafor in 2009 in the U.S. District Court for the Northern District of Georgia (“Georgia Court”). In 2010 Medafor filed counterclaims against CryoLife. On August 2, 2011 Medafor withdrew, without prejudice, its Motion for Partial Summary Judgment with respect to its contention that CryoLife owes Medafor approximately $1.3 million plus prejudgment interest for product Medafor shipped to CryoLife, stating that it would renew its motion at a later date. On September 30, 2011 the Georgia Court denied CryoLife’s motion for partial summary judgment regarding Medafor’s alleged wrongful termination of the EDA. The Georgia Court found that, atWritten discovery began in this early stage of discovery, CryoLife had not established as a matter of law that the parties drafted a certain section of the EDA clearly so as to supplant a specific aspect of the Georgia Uniform Commercial Code. The Georgia Court also found that the evidence submitted did not establish as a matter of law that the lettercase on which Medafor based its termination of the EDA failed to comport with the Georgia Uniform Commercial Code.

As previously reported, onOctober 8, 2010. On July 5, 2011 the Georgia Court appointed a Discovery Special Master to manage and supervise discovery pursuant to a Joint Motion for Appointment of Special Master filed by the parties. Pursuant to thethat appointment, the parties have met repeatedly with the Special Master since July regarding discovery issues. Both parties filed motions to compel certain discovery,issues, and on October 14, 2011, the Special Master granted in parthas ruled on a number of discovery motions brought by the parties. Depositions have been taken by both parties, and denied in part both parties’ motions. Thedepositions will continue through September 14, 2012, the date on which the Georgia Court has scheduledordered that non-expert discovery end. On April 10, 2012 the parties attended a status conference for November 29, 2011,with the Georgia Court, and at whichthat status conference, the Georgia Court reaffirmed September 14, 2012 as the end of non-expert discovery and instructed that trial will commence in April 2013.

The parties engaged in court-ordered mediation on March 22 and 23, 2012. At the April 10, 2012 scheduling conference the Georgia Court ordered the parties will discuss various discovery-related issuesto attend an additional mediation session on May 11, 2012. The parties subsequently agreed that the additional mediation session occur on June 8 and deadlines. 9, 2012 instead.

CryoLife expects discoveryintends to continue for a significant perioddefend itself vigorously in this action. At this time CryoLife is unable to predict the outcome of time. CryoLifethis matter; however, management believes that the trialoutcome of this matter will not occur until 2013.have a material adverse effect on CryoLife’s financial condition, profitability, or cash flows. Nonetheless, as this matter is ongoing, there is no assurance that this matter will be resolved favorably by CryoLife or will not result in a material liability to CryoLife, which could have a material adverse impact on CryoLife’s financial condition, profitability, and cash flows.

As previously reported, on July 14, 2011 Medafor filed a lawsuit against CryoLife in the U.S. District Court for the District of Minnesota (“Minnesota Court”). Medafor’s lawsuit requests thatOn March 30, 2012 the Minnesota Court granted CryoLife’s motion to dismiss this lawsuit, although it did grant a declaratory judgment that Medafor’sMedafor 30 days to file an amended lawsuit.

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reverse stock split on December 31, 2010 reduced the number of Medafor shareholders to below 500 and that, therefore, Medafor is not required to comply with the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (i.e., not required to register as a public company with the SEC). Medafor’s lawsuit also requests that the Minnesota Court award Medafor its costs and expenses in the lawsuit. On August 5, 2011 CryoLife filed a Motion to Dismiss Medafor’s claims arguing that there was no private right cause of action under Section 12(g) of the Securities Exchange Act of 1934. The parties argued the Motion to Dismiss in front of the Minnesota Court on October 11, 2011. As of October 25, 2011 the Minnesota Court had not ruled on the Motion to Dismiss. At this time CryoLife is unable to predict the outcome of this matter.8.  Inventories

Inventories are comprised of the following (in thousands):

9.  Goodwill and Other Intangible Assets

The Company’s intangible assets consist of goodwill, patents, trademarks, and other intangible assets, as discussed further below. These assets include goodwill,assets acquired technology, customer lists, and other intangible assets from the acquisition of Cardiogenesis, as discussed in Note 5 above, and PerClot distribution and manufacturing rightsassets acquired from SMI as discussed in Note 6 above.

Indefinite Lived Intangible Assets

The carrying values of the Company’s indefinite lived intangible assets are as follows (in thousands):

Based on its experience with similar agreements, the Company believes that its acquired contracts and procurement agreements have an indefinite useful life, as the Company expects to continue to renew these contracts for the foreseeable future. Accordingly, the Company’s indefinite lived intangible assets do not amortize, but are instead subject to periodic impairment testing.

Definite Lived Intangible Assets

The Company generally amortizes its definite lived intangible assets over their expected useful lives using the straight-line method. The gross carrying values, accumulated amortization, and approximate amortization periods of the Company’s definite lived intangible assets are as follows (in thousands):

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Amortization Expense

The following is a summary of amortization expense (in thousands):

As of September 30, 2011March 31, 2012 scheduled amortization of intangible assets for the next five years is as follows (in thousands):

10.  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. The Company generates deferred tax assets primarily as a result of write-downs of deferred preservation costs, inventory, and in-process research and development; accruals for tissue processing and product liability claims; asset impairments; and operating losses. The Company acquired significant deferred tax assets from its acquisition of Cardiogenesis in the second quarter of 2011 as discussed below.

As of September 30, 2011March 31, 2012 the Company maintained a total of $2.3$2.4 million in valuation allowances against deferred tax assets, related to state net operating loss carryforwards, and a net deferred tax asset of $19.8$18.4 million. As of December 31, 20102011 the Company had a total of $1.8$2.4 million in valuation allowances against deferred tax assets and a net deferred tax asset of $15.3$18.5 million.

The increase in the Company’s net deferred tax assets is due to the acquisition of Cardiogenesis in the second quarter of 2011, as Cardiogenesis had significant deferred tax assets, primarily due to its net operating loss carryforwards. The Company believes that the realizability of its acquired net operating loss carryforwards will be limited in future periods due to a change in control of its subsidiary Cardiogenesis, as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. The Company believes that its acquisition of Cardiogenesis constitutesconstituted a change in control. The deferred tax assets recorded on the Company’s Summary Consolidated Balance Sheets do not include amounts that it expects will not be realizable due to this change in control. A portion of the acquired net operating loss carryforwards is related to state income taxes and can only be used by the Company’s subsidiary Cardiogenesis. Due to Cardiogenesis’ history of losses when operated as a stand-alone company, management believes it is more likely than not that these deferred tax assets will not be realized. Therefore, the Company recorded a valuation allowance against these state net operating loss carryforwards. See also Note 5 above for a further discussion of the Company’s acquisition of Cardiogenesis.

The Company’s effective income tax rate was approximately 12% and 36%37% for the three and nine months ended September 30, 2011, respectively,March 31, 2012, as compared to a benefit of 34% for the three months ended September 30, 2010 and expense of 52% for the nine months ended September 30, 2010. The significant change in the Company’s effective income tax rate for the three months ended September 30, 2011 as compared to the prior year period was due to the discrete and favorable effect of deductions taken on the Company’s 2010 federal tax returns, which were filed in the third quarter ofMarch 31, 2011. For the nine months ended September 30, 2011, this favorable effect was largely offset by the unfavorable tax treatment recognized in the second quarter of 2011 of certain acquisition related expenses, which the Company incurred related to its acquisition of Cardiogenesis.

The Company’s tax years 2008 through 20102011 generally remain open to examination by the major taxing jurisdictions to which the Company is subject. However, certain returns from years prior to 2008, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.

11.  Debt

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GE Credit Agreement

On October 28, 2011 CryoLife amended and restated its March 26, 2008 CryoLife entered into a credit agreement with GE Capital as lender (the “GE Credit Agreement”). which provides revolving credit for working capital, acquisitions, and other corporate purposes. The amendment increased the borrowing capacity under the GE Credit Agreement provides for a revolving credit facility in an aggregate amount notfrom $15.0 million to exceed the initial commitment of $15.0$20.0 million (including a letter of credit subfacility). and extended the expiration from October 31, 2011 to October 28, 2014. The initial commitment may continue to be reduced or increased from time to time pursuant to the terms of the GE Credit Agreement. Since 2009, as requested by the German courts, the Company has been maintaining a letter of credit relating to the Company’s patent infringement legal proceeding against

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Tenaxis, Inc. in Germany, which reduces the aggregate borrowing capacity. The Company amended the GE Credit Agreement three times during 2011 to extend theletter of credit had a one-year initial term of the credit facility, which now expires on October 31, 2011.and automatically renews for additional one-year periods.

The GE Credit Agreement places limitations on the amount that the Company may borrow and includes various affirmative and negative covenants, including financial covenants such as a requirement that CryoLife (i) not exceed a defined leverage ratio, (ii) maintain a minimum adjusted earnings subject to defined adjustments as of specified dates, and (iii) not make or commit capital expenditures in excess of a defined limitation. Further, since April 15, 2008, asAs required under the terms of the GE Credit Agreement, the Company has beenis maintaining cash and cash equivalents of at least $5.0 million in accounts in which GE Capital has a first priority perfected lien. These amounts are recorded as restricted securities as of September 30, 2011March 31, 2012 and December 31, 20102011 on the Company’s Summary Consolidated Balance Sheets, as they are restricted for the term of the GE Credit Agreement. Also, the GE Credit Agreement requires that after giving effect to a stock repurchase the Company maintain liquidity, as defined within the agreement, of at least $20.0 million. The GE Credit Agreement includes customary conditions on incurring new indebtedness and prohibits payments of cash dividends on the Company’s common stock. There is no restriction on the payment of stock dividends. Commitment fees are paid based on the unused portion of the facility. As of September 30, 2011March 31, 2012 the Company was in compliance with the covenants of the GE Credit Agreement.

Amounts borrowed under the GE Credit Agreement are secured by substantially all of the tangible and intangible assets of CryoLife and its subsidiaries and bear interest as determined by GE Capital at either LIBOR, with a minimum rate of 3%4.25%, or GE Capital’s base rate, with a minimum rate of 4%3.25% each, plus the applicable margin. As of September 30, 2011March 31, 2012 and December 31, 20102011 the outstanding balance of the GE Credit Agreement was zero, the aggregate interest rate was 6.25%6.50%, and the remaining availability was $14.8$19.8 million.

Other

Total interest expense was $49,000$65,000 and $29,000$30,000 for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $116,000 and $145,000 for the nine months ended September 30, 2011 and 2010, respectively, which included interest on debt, capital leases, and uncertain tax positions.

12.  Commitments and Contingencies

Liability Claims

The estimated unreported tissue processing and product loss liability and any related recoverable insurance amounts are as follows (in thousands):

Further analysis indicated that the liability as of September 30, 2011March 31, 2012 could be estimated to be as high as $4.3$3.8 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.

Employment Agreement

The Company has an employment agreement with its Chief Executive Officer (“CEO”) that confers benefits which become payable upon a change in control or upon certain termination events.events, such as voluntary retirement. As of both September 30, 2011March 31, 2012 and December 31, 20102011 the

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Company has recorded $2.1 million in accrued expenses and other current liabilities on the Summary Consolidated Balance Sheets representing benefits payable upon the CEO’s voluntary retirement.retirement, for which he is currently eligible.

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13.  Common Stock Repurchase

On June 1, 2010 the Company announced that its Board of Directors had authorized the purchase of up to $15.0 million of its common stock over the course of the following two years. On November 1, 2011 the Company announced that its Board of Directors had authorized the Company’s purchase of $15.0 million of its common stock through December 31, 2012, which included approximately $7.7 million remaining from the June 1, 2010 repurchase program and an additional $7.3 million, for a total authorization of $22.3 million. The purchase of shares may be made from time to time in the open market or through privately negotiated transactions, on such terms as management deems appropriate, and will be dependent upon various factors, including: price, regulatory requirements, and other market conditions. For

In the ninethree months ended September 30, 2011March 31, 2012 the Company purchased approximately 280,000282,000 shares of its common stock for an aggregate purchase price of $1.5 million. For the twelve monthsyear ended December 31, 20102011 the Company purchased approximately 1.0 million593,000 shares of its common stock for an aggregate purchase price of $5.8$2.9 million. These shares were accounted for as part of treasury stock, carried at cost, and reflected as a reduction of shareholders’ equity on the Company’s Summary Consolidated Balance Sheets.

As of March 31, 2012 the Company had purchased a total of 1.9 million shares for an aggregate purchase price of $10.2 million in common stock and had $12.1 million in remaining authorizations under these programs.

14.  Stock Compensation

Overview

The Company has stock option and stock incentive plans for employees and non-employee Directors that provide for grants of restricted stock awards (“RSA”s), restricted stock units (“RSU”s), performance stock units (“PSU”s), and options to purchase shares of Company common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. The Company also maintains a shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of its 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.

Equity Grants

The Compensation Committee of the Company’s Board of Directors authorized awards of RSAs and PSUs from approved stock incentive plans to non-employee Directors and certain Company officers totaling 360,000 and 215,000317,000 shares during the ninethree months ended September 30, 2011 and 2010, respectively,March 31, 2012, which had an aggregate market value of $1.9 million$1.7 million. The performance component of PSU awards granted in 2012 is based on attaining specified levels of adjusted EBITDA, as defined in the grant, for the 2012 calendar year. The Company currently believes that achievement of the performance component is probable, and $1.3 million, respectively.will reevaluate this likelihood on a quarterly basis.

The Compensation Committee of the Company’s Board of Directors authorized awards of RSAs from approved stock incentive plans to certain Company officers totaling 287,000 shares during the three months ended March 31, 2011, which had an aggregate market value of $1.5 million.

The Compensation Committee of the Company’s Board of Directors authorized grants of stock options from approved stock incentive plans to certain Company officers totaling 159,000 and employees totaling 599,000 and 427,000574,000 shares during the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, respectively, with exercise prices equal to the stock prices on the respective grant dates.

Employees purchased common stock totaling 64,00035,000 and 43,00033,000 shares in the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, respectively, through the Company’s ESPP.

Stock Compensation Expense

The Company values its RSAs, RSUs, and RSUsPSUs based on the stock price on the date of grant andgrant. The Company expenses the related compensation cost of RSAs and RSUs and of PSUs, for which achievement of the performance component is probable, using the straight-line method over the vesting period. The Company uses a Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the Company’s 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, expected volatility, dividend yield, and the risk-free interest rate. The period expense is then determined based on this valuation and, at that time, an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company and is adjusted to reflect actual forfeitures at each vesting date.

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The following weighted-average assumptions were used to determine the fair value of options:

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The following table summarizes stock compensation expenses (in thousands):

Included in the total stock compensation expense, as applicable in each period, were expenses related to RSAs, 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 the Company’s ESPP. These amounts were recorded as stock compensation expense and were subject to the Company’s normal allocation of expenses to deferred preservation costs and inventory costs. The Company capitalized $61,000$55,000 and $80,000$52,000 in the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $168,000 and $217,000 in the nine months ended September 30, 2011 and 2010, respectively, of the stock compensation expense into its deferred preservation costs and inventory costs.

As of September 30, 2011March 31, 2012 the Company had a total of $2.1 million, $2.0 million, and $259,000 in unrecognized compensation costs of $1.8 million related to unvested stock options and $3.4 million related to RSAs, RSUs, and RSUs, respectively,PSUs, before considering the effect of expected forfeitures. As of September 30, 2011March 31, 2012 this expense is expected to be recognized over a weighted-average period of 1.81.93 years for stock options, 1.71.75 years for RSAs, and 2.11.89 years for RSUs.RSUs and PSUs.

15.  Income Per Common Share

The following is a summary of comprehensive income (loss) (in thousands):

The tax effect on the cumulative translation adjustment is zero for each period presented. The accumulated other comprehensive loss of $27,000 as of September 30, 2011 and loss of $32,000 as of December 31, 2010, consisted solely of currency translation adjustments.

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