Greetings and welcome to CryoLife Corporation Second Quarter 2015 Financial Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to CryoLife management team. Thank you. You may begin.

Good morning. This is Ashley Lee. Before we begin, I'd like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made in this call that look forward in time involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future. Additional information concerning risk and uncertainties that may impact these forward looking statements is contained from time-to-time in the Company's SEC filings and in the Press Release that was issued this morning. Now, I'll turn it over to Pat.

Thanks, Ashley, and good morning. Thanks everyone for joining the call today. This morning I'll cover the following two topics. First, the high level summary of our second quarter results, and second an update on our growth factors that we've been communicating for the past year. Following my comments Ashley Lee, our CFO will provide a detailed review of our second quarter 2015 financial results and our updated 2015 guidance. We'll then open the lines for Q&A. This morning we reported total revenues of $35.5 million for the second quarter, a 2% increase year-over-year. We are pleased with the improvement in tissue processing revenues which were up 9%. Product revenues were down 2% and reflect mix results for the quarter. On the one hand we continue to see very strong performance in our recently launched products of ProCol, PhotoFix. While on the other hand, we were disappointed with the lower growth rate for HeRo and the negative impact of foreign currency in markets like Europe and Brazil. Finally as we have been communicating all year, we had planned on revenue reductions of BioGlue in France as our distributors sell down our inventory in preparation for us going direct on October 1st. Ashley will provide further details about the quarter during his remarks. We also continue to make good progress on the four growth factors that we've been communicating for the past year. Number one; building momentum for our new products, ProCol, PhotoFix. Number two; increasing our global distribution footprint by going direct in France on October 1st. Number three; expanding indications for our key products which include the enrollment of the PerClot surgical IDE clinical trial in US as well as BioGlue in Japan. And number four; assessing business development opportunities. In addition, we've added one growth factor to the…

Thanks, Pat. This morning we reported our results for the second quarter of 2015. The following factors influenced our second quarter performance. Compared to the prior year, total company revenues increased 2% to $35.5 million for the second quarter, driven by 9% year-over-year increase in tissue processing revenues, driven primarily by price increases. Product revenues decreased 2% in the quarter primarily as a result of the conversion to a direct sales model in France and FX which is resulted in both the currency translation issues and effective orders from our a US distributors who order in US dollar. On the bottom line, we reported the loss of $0.02, however, excluding $1.4 million in severance related charges, $857,000 in business development expenses and an $891,000 gain on the sale of investment, we reported non-GAAP EPS of $0.03 per share. Focusing on geographic revenues. Our domestic revenues increased 5% for the second quarter of 2015 compared to the prior year period. This increase was driven primarily by price increases for tissue processing and the recent launches of ProCol, PhotoFix. Our second quarter international revenues were $7.7 million, down 7% compared to the second quarter of 2014. International revenues accounted for 22% of our business in the second quarter. The decrease in international revenues was driven by lack of revenues from our French distributor as we transition to a direct distribution model in France and the effects of foreign currency which has affected our distributor ordering patterns and volumes in several large o-US markets including Russia and Brazil. Focusing on individual product lines. Tissue processing revenues increased 9% for the quarter compared to the prior year primarily due to price increases. As Pat mentioned, we are also seeing positive effects of the processing improvement initiatives that we implemented earlier this year. Our tissue…

Thanks, Ashley. We will now open the lines for questions. Rob?

[Operator Instructions] Our first question comes from Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi, Pat and Ashley, good morning. How are you? So few questions. You said the uptick in the tissue business was primarily as a result of pricing. Could you talk about the pricing and specific to what's pricing affected in the percentage of that or could you also talk about the number of units that were sold? Was that in line with expectations, an increase or decrease from Q1? Thanks.

If you look at a year-over-year basis, our cardiac units were flat and our vascular units were actually up about 1%, on sequential basis we saw volumes increase for both cardiac and vascular tissues. On a year-over-year basis, the non percent increase in revenues was almost exclusively driven by price increases. Now with that being said, as Pat mentioned and I alluded to in my comments, we are seeing some meaningful improvements in both our processing yields and volumes following the work that we did to fix the issues with the FDA late last year and early this year. And we expect going into the third quarter and especially in the fourth quarter that our volumes should increase significantly. I'll add one other thing too, over the last couple of years we've had a mid year price increases for tissues in each of the last two to three years that was -- so those were affected on July 1st and you are seeing the impact of some of those price increases on our business.

Okay. But the non percent you referenced was price increases prior to a mid year price increase?

That's correct.

Okay. And when was that from? Price increase from last year's 9%?

Yes, pretty much.

Okay. So you expect another beginning July 1st.

Yes. And they might not be as significant as we've had in the last two to three years but we will be having a small price increase in the middle part of this year too.

Okay. Could you talk a little bit about the total sales force now that you have out there in the marketplace and the composition of it in net delta over the past couple quarters please.

Yes. We got two different channels in the US. We got a cardiac -- a channel that focuses on cardiac surgery and got a channel that focuses on vascular surgery. So the vascular surgery channel is with reps and managers as roughly at number of -- roughly 30 and the cardiac sales force is at roughly 20 in that in typical gyration, we got a pretty stable field organization, but you do have turnover from time to time. So I'd say it has been kind of on par with what we've seen historically.

Okay. And couple more for me. Could you comment thus far on what are you seeing in Q3? I know that historically you have a bit of seasonality effect for the third quarter and also could you talk about any anticipated headwinds going forward as far as currencies. And if there is any hedge and program and plan or what are you seen at least thus far?

Maybe the hedging front, we don't hedge as of a way and trying to predict currencies as we found out at the beginning of this year was fairly difficult to do. That has been a big challenge for us particularly in what we've seen in the Euro as well as what we saw in Brazil. That's been -- that the Brazil, the performance of the Real and the economy down there. That's a pretty good side of business for us in the international markets and we've kind of seen that dry up and that's been a big challenge frequently on the international vague number. I don't know if Ashley do you want to talk about this seasonality I mean it is pretty early into the quarter.

Yes. I mean it is relatively early. I think typically in the past you've seen our cardiac business kind of spike a little bit in the third quarter just due to the number of pediatric surgeries that occur. What I'll say right now in regards to July and again we are one month into the quarter but so far we seemed to be tracking the plan.

Our next question comes from Tom Gunderson with Piper Jaffray. Please proceed with your question.

Hi, this is actually Kyle on for Tom. So I'll start with the ProCol and the reason its reduction as you talked about in the prepared remarks, the strategy will be to increase surgeon adoption to drive growth and to do this driving share from the competing product will be particularly important. I know it is early but what have your interactions been like with the practitioners if you -- as you rolled out the product and have the clinical data supporting higher patency rates over the competing product played a significant role and the usage by the docs.

Yes. I mean it is -- I think it is an interesting product and that it's pretty narrow segment in this kind of biological grafts for dialysis but it is a very tough environment. In fact, we think there is a lots of future applications in dialysis where it actually could potentially compete head to head in certain patient population versus for example [indiscernible]. I think it is too early to tell, I mean we just launched this product at the beginning of the year. So if patients were inferred on January 1st, they are only six months into their kind of time with the graft, so try to figure out with their one year PAPC [ph] rates are I think it is pretty difficult. I think I mean it could safe to say that we've -- there have been a number of different clinical papers published on that technology and I think we are seeing similar performance in the marketplace. And I think this is -- I think one of the thing is if you look at the dialysis marketplace, these patients are in really significantly need and they are really looking for products that can be more durable and this graft has some very unique characteristics that make it I think a very interesting options for physicians as we see get more and more data. So I think to date it has been pretty good. I think a lot of these -- a lot of physicians will trial the product and see how it works in their patients and so probably seeing good feedback.

Great, thanks. And then looking at R&D for the quarter, as you mentioned enrollment was maybe little bit slower, were you expecting a little bit more R&D given the IDE ramp. I know you reiterated R&D guidance for the year but could you comment Ashley maybe a bit more Q3 and Q4 cadence and sort of how we should think about that.

Yes. I mean if you look at the -- where we are currently stand with having sites fully qualified for enrollment, I think that would kind of indicate that the spend in 4Q we are expecting to be little more than 3Q. And then for the full year we guided to between $13 million and $14 million and so that's our current guidance. But again 4Q is probably maybe little heavier than 3Q.

Okay, thanks. And then lastly what was the actual top line impact for FX for the quarter?

I think that it's probably close to around $300,000, it is roughly around 1% ballpark. I won't confirm that and if it is different I will switch in --

I think it is rough $400,000

About $400,000

Our next question is from Joe Munda from First Analysis. Please proceed with your question.

Good morning, guys. Can you hear me okay? Thanks for taking the question. Real quick just talked about the trial for 15 locations seems to be moving slower than you had originally anticipated. Can you give some color there as far as perhaps some of the reasons there as why is this taking little bit longer, just a little bit more granularity will be great.

Yes, I know and I tried to address it up front and I mean just give you some high level, the process to get a site up and running in 2015, it's become much more difficult for any IDE type clinical trial. So there is the whole IRB process where you have to go through the Internal Review Board of the hospital to get the kind of the regulatory approval on the hospital side. And once that's done then you have to get the contract approved and that's goes into all the different stipulations on who is responsible for what and also kind of legal type topics like indemnification different types of things, so I mean some institutions have become very difficult to order and this is through my experience over the last 15 years. I had previously I have seen hospital take a year to get their contract negotiated. Now we try to avoid places like that. But I think the fact of the matter is just the time to get the IRB up, the time to get the contract signed and then you got to train the center so there is a lot of work and predicting that is always -- it is always difficult. I mean we feel pretty good that the kind of things are moving along through the phase and as we see now we've got 4 out of 15 centers up. The remaining centers are in the -- either the IRB contracting or training phase. And we feel that by the end of this year we should have all 15 centers up and running. And once you have that this trial is actually should be fairly easy to enroll. It is only three months follow up and we are doing a module or PMA so I think there are other things at the backend of this that give us some confidence that 2018 day is very realistic. But as each quarter goes by we will give you guys update on how we are progressing on the getting these centers up and running.

Okay and thank you. I appreciate it. I mean the timeline you provided us is that basically a worse case scenario or could it be expedited in any way I mean you just said you provided us an update but is there --

I think I actually it would be -- it is hard to say we have been conservative when we are missing our enrollment. But at the same time I mean if you look at -- if we have all the sites up and ready to go by January 1st, and we can enroll this trial and just make it say in 2016, there is a three months follow up in a module PMA is a six months the final approval be a six months window assuming everything solid. They get you still well within 2018 even if you kind of stretch out your enrollment phase. So I think that -- I think there is a possibility we could get into 2017, we are just trying to be conservative on the dates we are showing out there.

Okay. And then my other question regards to what's going on with Medafor back and forth between you guys, any updates there as far as resolution or we still -- is it still like a wait and see type a situation?

Yes. I mean I think at this point in time I mean the more -- it is kind of ironic situation like the longer the trial takes to enroll the less exposure we have on the length of their patent. Their patent expires and I have mentioned this previously, their patent expires in February of 2019. So let's to say we say early 2018 approval, you got a one year window when you are still -- you are in junction still in effect. So again to some degree this kind of legal overhang in the trial enrollment kind of go hand-in-hand and I don't want to drag the trial out but at the same time if bar going to be unreasonable about trying to settle something then we'll this take longer enroll to trial and will launch when their patent expires. So I think there is a potentially way we could get resolution. I mean we still have the legal case open. And we will provide updates on that. There is really nothing new there. The case is still in effect and we are going to look at our options and if we feel like we have one then we will pursue it. And but again I think for the investors on a phone the patent expires February, 2019, we are saying that based on the time that we just talked about on the trial, we could potentially have approval by February of 2018, that's 12 months difference. And whether we push the cash forward or try to get some financial resolution with bar, we will see as time goes by.

Okay. As far as the tissue business is concerned, talked about some efficiencies there, it was nice to see this quarter obviously nice reversal here after four, three quarters, obviously the FDA playing its part there but I mean can you give us some more -- you talked about improving yields, some of the stuff that you put in place but can you give us some examples, some concrete examples of why we are seeing improvements in that business. Was there pent-up order demand as well because of the FDA? Anything would be -- I know you said that the price increase is but you are expecting further volume increases at the end of the year to 2016, so I mean any color there would be helpful.

Yes. No and so I think Ashley mentioned this in his and I mentioned as well in my comments. In my first six-seven months here we really did like data the student body writes on quality and getting the FDA warning letter result. And through that time we actually had significant backorders on tissue both for SG pulmonary and aortic valves. But frankly it really -- we really couldn't focus on that because our number one priority here and still is today is quality. And once we got that result the FDA warning letter got lifted in March, we literally then did -- we feel like we got a underpinning here of quality and then we just student body write on tissue, so we've been meeting with our top leaders kind of on a biweekly basis and have a number of key initiatives going on tissue. And we've been able to through -- a probably dozen different initiatives including increasing our procurement, increasing our hiring in the lab, beefing up the training, coming up with different programs to improve our yield and efficiencies. Again as a dozen different projects that are underway and we've been able to kind of forecast out as Ashley mentioned meaningful increases to come on tissue volumes as well as improvements in costs and that what we said at the end of last quarter. So it is going to take us some time and you got to remember that the day we put tissue in the freezer it takes a quarter for it to come out. So all the initiatives we've been working on starting in March haven't event hit the freezers yet or haven't hit the commercial market yet. And today we still -- I just looked at the numbers yesterday, we still probably have $7 million and $8 million of tissue on back order primarily in the pediatric pulmonary valve adult aortic valves and SG. And we expect to be out of that good chunk of those back orders as we go into 2016. So we think the picture is going to get much better for tissue on the top line and on the bottom line as we move through the rest of 2015 and go into 2016.

Okay. That's very helpful. Thanks Pat. Ashley, some housekeeping items here. Can you just rundown operating cash flow, CapEx and depreciation and amortization for the quarter?

Yes. Operating cash flow was a little over $5 million for the quarter. Depreciation, amortization was probably close to around $2 million and then CapEx was right at about $2 million give or take for the quarter.

Then Ashley I guess my final question business development expense is $857,000, based on Pat's comments that you are continuing to look at opportunities, is that an expense we could expect or is that expense we can model out going forward and then coming quarters or was this quarter just a one timer, any color there that would be great.

Yes. Only thing that when Joe, I mean this is one that I mean there is obviously a sensitive area because we clearly aren't getting into specifics around what it was and obviously is a tough position for us because there is nothing really to announce here and but we've been very active in every financial conference -- that I have been too over the last nine months, we've talked about our four growth factors. We talked about our new products, we talked about expanding globally, we talked about expanding indications, and we talked about expanding the company through M&A. And this is the first time you've seen it show up in the P&L and it is pretty sizable chunk. But I would not say here and tell you that you should model out of $857,000 for the next four quarters. And it is hard to predict what those are going to be because frankly we are always looking at different opportunities and so until we can say more on it I have a hard time giving you guides on how to model it. I don't know if you want to add anything, Ashley.

No. That the spent on evaluating the opportunities just depends on what the opportunities are. So it is very difficult amount to let out

Okay. And severance expense, I mean is that were off next quarter or we expecting another million -- $1.4 million towards --

No. That was an item that was specific to the second quarter.

There are no further questions. At this time, I'd like to turn the call back over to management for closing remarks.

Yes. Look, I want to thank everybody for joining us. And as I mentioned we have some -- we've got some work to do on the tissue side. I think the tissue; I am actually very pleased that tissue is going to be improving over the rest of 2015 and into 2016. And I think it is a very positive sign and I will be pleased to share those numbers with you as those come out. We had some good news in the quarter. The fact that we got the BioGlue indication in Japan is a significant upside doubling that market opportunity in one of the highest priced highest margin markets in the world. And we are getting ready launch that in the third quarter. We also have been kind of taken our loans through the first couple of quarters and we will do the same in Q3 on going direct in France. And we are up front about that, not necessarily the country but we are doing it now you know the country. But we have been not selling anything in France for the first two quarters. And starting October 1st, we are going to start selling BioGlue end user prices end user margin with the same direct team that was doing it under our distributors. So that's a nice positive upside. So I feel good about the -- the tissue business is going to look better. I think our BioGlue franchise will look stronger with what we are doing in Japan, what we are doing in France. We've a great product momentum on the ProCol and PhotoFix. And we continue to believe that will go strong. We got some work to do on the trial, and we've been very open about that. We've also got some work to do on HeRO, I am not real happy about the growth rate in HeRO at this point. But we are working to get that back in line. So as we go -- as we exit 2015 and going to 2016, I think we are going to start seeing an improving top line and improving bottom line. We are always going to keep working and every quarter tries to get better. So thank you guys all for your interest and attention to CryoLife. And have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect your line at this time.