Ashley Lee – EVP, COO, CFO and Treasurer Patrick Mackin – President and CEO.

Jeffrey Cohen – Ladenburg Thalmann Joe Munda – Sidoti & Company.

Greetings, and welcome to CryoLife Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 call over to management. Thank you, you may begin..

Good morning, this is Ashley Lee. Welcome to our third quarter conference call. 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, including the guidance for 2014 that I will provide in a moment.

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, including the Risk Factor section of our Form 10-K for the year ended December 31, 2013 and our Form 10-Qs for the first and second quarters of 2014, the Form 10-Q for the third quarter of 2014, which we expect to file shortly and in the press release that was issued this morning.

Now I’ll turn the call over to Pat Mackin..

Thanks, Ashley, and good morning and thanks for joining the call today. On the call this morning we’ll cover four topics. First, I will provide a brief review of my background and the reasons that I joined CryoLife. Second, I’ll provide a high level summary of our Q3 results. Third, I’ll provide an update on the top priorities for the company.

And fourth, be followed by Ashley Lee, our CFO, who will take you through Q3 financial results and provide an update to our guidance. Finally we’ll then open up the lines for Q&A. So let’s get started. I’d like to take a few minutes to introduce myself and give you some background as to why I’m excited about leading CryoLife.

As you know, I joined CryoLife on September 2nd as President & CEO, and I was recently elected to the Board of Directors. CryoLife is a natural fit to my over 20 years of leadership experience in cardiac and vascular medical companies. I spent the last 12 years in Medtronic.

During my time there I lead their global in the vascular business for two years, I let their European vascular intervention business for three years, and I ran their CRM division for seven year’s. In the five years before joining Medtronic, I led Genzyme’s cardiac surgery business.

So in total, I’ve spent more than 20 years running and working in businesses that are focused on cardiac surgeons, vascular surgeons, interventional cardiology, and electrophysiology, which ideally suits me for the role here in CryoLife. Given my strong cardiac and vascular background, there were several things that attracted me to the company.

First, the company has existing novel and innovative products like BioGlue, the HeRO Graft and SynerGraft Technology. Second, they have a seasoned professional sales team that are focused on cardiac and vascular surgeons. Third, recently launched products like PerClot Topical, and about to be launched ProCol and sooner after PhotoFix.

Four, the prospects for longer term indication expansion of products like PerClot in the U.S. surgical market, as well as BioGlue in Japan. Five, a profitable and growing business to enable future acquisitions. And sixth, when taken altogether, these factors have created a very strong CryoLife brand in the cardiac and vascular surgery markets.

I’m excited about combining my experience and knowledge of the cardiac and vascular customary markets with these strengths that I’ve mentioned. While I’ve only been here for a part of the organization for a short time, I’ve been impressed with the caliber of the team and the growth strategy they have established.

In addition, I’ve meet with a number of customers around the world which has enhanced my conviction in the strength of our product offering and the entire organization.

At this point I’m still in the process of evaluating our businesses and do not anticipate significant changes to our operations until it completed a strategic reviewing plan with both, the management team and the board. Turning now to the third quarter results. This morning we reported solid operating results for the third quarter.

Total revenues increased 2% year-over-year to a third quarter record of $37.1 million, this was led by 8% growth in our product revenues which reached $20.4 million. This was driven by strong revenue performance across several product categories including BioGlue and PerClot which were up 6% and 13% respectively.

And HeRO Graft which was up 45% from the same period last year. We’ve generated $2.5 million in cash flow from operations and on the bottom line we delivered earnings per share of $0.08. What I’ve concluded in my comments, Ashley will provide a detailed review of the Q3 financial results.

As we work to prepare our five year strategic plan in the coming months, I wanted to provide an overview of where my focus will be during this timeframe. And we will provide updates on these key initiatives each quarter.

The three areas that I’ll be focusing on are as follows; number one, improving our quality systems and resolving the FDA warning letter. Number two, launching three new products; PerClot Topical, ProCol and PhotoFix. And number three, expanding indication of key products, PerClot U.S. Surgical IDE, and BioGlue indication expansion in Japan.

First, on the quality front, the entire organization has been focused on completing all actions related to the following [ph] three observations with the goal being prepared for future FDA re-inspection and the lifting of the warning letter.

In addition, we recently meet with the FDA’s Atlanta district office regarding our warning letter and confirmed to them that this is our number one priority, and that we are working hard to improve our quality systems and prepare for the warning letter re-inspection.

We expect that the FDA will conduct a facility re-inspection in the next three to four months, and in meantime, we expect to continue to process our tissue products and distribute them as usual with no disruption to our operations or overall business. Second, I’d like to provide an update on our new products launches.

As discussed on our last conference call, we began the initial launch of the PerClot Topical hemostatic powder in the U.S. ENT market just before the Labor Day holiday.

We are pleased that we had numerous customers that are actively trying PerClot Topical throughout the U.S., including many sites could have the product in front of their value analysis committee for we think we have an advantage versus the competition.

We’ve received very positive surgeon feedback on PerClot Topical’s performance confirming our confidence in its efficacy. We expect to see further adoption in a niche reviews from PerClot Topical sales beginning in the fourth quarter this year, and we look forward to updating you on the progress on our Q4 earnings call.

In the fourth quarter we also expect to benefit from the launch of ProCol. In mid-October, Hancock Jaffe received PMA approval for their new manufacturing facility which allowed them to restart ProCol manufacturing.

As a reminder, ProCol is complimentary to the HeRO Graft and the treatment continuum of end-stage renal disease, and the product is used after the failure of a synthetic graft. There is currently one player in the market with a bovine carotid artery product that had $11 million business last year.

Our ProCol product is comprised of bovine mesenteric vein that has been through a proprietary process that we feel offer significant product differentiation advantage. The vein has higher elastin content than artery and has shown higher pain rates in clinical trials of two years. ProCol had a 73% two year pain fee whereas the competition was at 64%.

So we are confident that our strong vascular surgery sales team will take share with this novel and differentiated product. We’ve just begun to receive initial shipments in ProCol inventory or are in the process of rolling out the product in Q4.

Additionally, we expect to launch the PhotoFix bovine pericardial patch later in the fourth quarter or early next year. We believed PhotoFix has the potential to become the product of choice of pediatric cardiac surgeons in the $30 million plus market for biological patches used in cardiac and vascular surgical procedures.

I recently spent time at a top pediatric cardiac center in the U.S., all the surgeons had previous experience with the product, they confirmed the differentiated benefits compared to other commercially available products.

The product is easy to use as it’s ready off the shelf and doesn’t require any processing, it has unique channeling [ph] characteristics which are similar to anthologist tissue, and it says there is no good aldehyde treatment required.

The surgeons we spoke were very excited that we will be sending the product and are looking forward to having it available again for their patients. As for the third area of focus, one of our biggest opportunities for growth is the expansion of the U.S. indication of PerClot into general surgery, cardiac surgery, and urology surgery.

There is currently only one competitor in this products base, the revenues for which are currently estimated at approximately $60 million annually. In terms of our U.S. IDE clinical trial for PerClot for using surgical procedures, we now expect enrolment in the trial to begin in the first quarter of 2015.

As a reminder, we have already received an approval from the FDA for the trial and we’re working to finalize the trial protocol and other design considerations. We have a planned call with the FDA during the fourth quarter to address their study design considerations, after which we intend to resubmit the IDE for approval.

Based on the current timelines, this would position us for a potential FDA approval of PerClot surgical in 2017. In addition on the near term indication expansion opportunity is BioGlue in Japan. The current indication for BioGlue in Japan is for aortic dissections, as indication that our distributors have done a very good job in penetrating.

This new expansion broadly use of BioGlue beyond the aortic dissections into all aortic, cardiac and large additional procedures which would double the market opportunity. We are working with our partner there as well as with MHLW in Japan and hope to see an approval in the first half of 2015.

With our focus on the PerClot Topical launches, as well as U.S. IDE, I’d like to provide a brief update regarding our ongoing litigation with C.R. Bard. Following our filing of an action for declaratory judgment action Bard and certain of its subsidiaries requesting confirmation that our sales of PerClot will not infringe Bard’s patent.

Our entire claim for patent infringement and also filed for preliminary injunctioning as CryoLife aiming to prevent us from selling PerClot Topical in the U.S. The preliminary injunction hearing date is set 1st January.

We believe that we have a strong case in merit to the infringement claims and feel confident in our ability to prevail in a preliminary injunction motion. In any event, we’ll continue our launch of PerClot topical and moving forward with our PerClot IDE clinical trial.

The final update is regarding the FDA circulatory systems device panel meeting that was held on October 9th. This is for the classification or for CryoValve SG Pulmonary Human Heart Valve products which historically has been unclassified.

I attend to the panel meeting and our team presented the preliminary analysis of prospective and retrospective study covering 800 patient years of positive safety and efficacy data on these products.

While we are hoping for a recommendation to classify CryoValve SG as a Class II medical device, the panel voted 12:4 to recommended classification as a Class III medical device which would require a PMA. With the panel’s recommendation in hand, the FDA will now make a decision on CryoValve SG’s classification.

We expect that the FDA will announce a preliminary decision by the end of this year or an early Q1, likely in favor of Class III. Noting [ph] this decision has been released, we plan to discuss with the FDA the requirements for approval of a PMA and we are hopeful that we’ll be able to utilize our existing data to support these efforts.

In addition, usually a 30-month transition period for companies to become compliant with the new regulatory requirements related to reclassification. So in the near term, we expect that it will be business as usual with respect to our processing and sales of the SG CryoValve Heart Valve.

I will now turn the call over to Ashley for detailed review of our third quarter results and updated financial guidance..

Thanks, Pat. This morning we reported our results for the third quarter of 2014. We continue to make progress on executing our strategy to leverage our established salesforce to drive growth from an expanding portfolio of high margin medical device products. The following factors influenced our third quarter performance.

Total company revenues increased to $37.1 million for the third quarter driven by 8% year-over-year revenue growth from our higher margin product segment. Our international revenues were up 4% for the third quarter of 2014 compared to the prior year period, primarily driven by growth outside of Europe.

Our domestic revenues increased 2% for the third quarter of 2014 compared to the prior year period, primarily driven by 35% increase in HeRO Graft revenues. I have more on that later in my comments. Worldwide BioGlue revenues in the third quarter were up 6% year-over-year. International BioGlue revenues were up 11%, on an 11% increase in volume.

Domestic BioGlue revenues were up 3%, on a 1% increase in volume. This was the fifth straight quarter that we’ve seen an increase in domestic volume year-over-year. Total company HeRO Graft revenues increased 45% to $2 million in the third quarter of 2014 compared to $1.4 million in the third quarter of 2013. This came on a 45% increase in volume.

This increase reflects the growing interest in the HeRO Graft as a long term solution for hemodialysis patients who are out of excess options. Internationally we continue with our launch into European markets where we recorded $167,000 in revenue during the quarter. Overall we remain very optimistic about the prospects of the HeRO Graft.

PerClot sales increased 13% for the third quarter of 2014 compared to the third quarter of 2013. The increase is due to growth in both new geographies and new indications including neurology and neurosurgery. The quarter included a nominal amount of revenue from the U.S. where we launched PerClot Topical just before Labor Day.

We continue to actively trial the product and work our way through a new product in value analysis. We continue to believe that this opportunity will have a meaningful impact on our sales in the future.

Although revenues from our TMR product line decreased 2% in the third quarter of 2014 compared to 2013, which resulted primarily from a decrease in console sales, hand piece volume grew 12% year-over-year and 7% sequentially over to the third quarter of 2014. Tissue processing revenues were down 4% for the quarter compared to the prior year.

The majority of this decrease resulted from a $600,000 decrease in tissue shipments into Europe. Recall that we discontinued regular shipments in the EU earlier this year. Our domestic tissue processing revenues decreased 1% year-over-year. Our effective tax rate for the third quarter was 21%.

The tax rate benefited from favorable deductions taken on the company’s 2013 tax return which was filed in the third quarter of 2014. We expect that our effective tax rate for the full year will be approximately 25% and we expect it to be even lower than that if the R&D tax credit is renewed for 2014 before the end of the year.

As of June 30, 2014, we had $35.7 million in cash, cash equivalents and restricted cash and securities. We had several large cash outlays in the first nine months of 2014.

They included approximately $4.6 million for share repurchases, $2.5 million for dividends, $2.1 million for PerClot inventory purchases pursuant to minimum purchase requirements, $2.1 million related to business development activities, in particular for ProCol, and $1 million for development milestone payments for PerClot.

Despite these uses of cash, our balance sheet remains very strong. We continue to carry no debt and expect to continue to generate operating cash flow. Finally, during the quarter we renewed our credit facility with GE Healthcare Finance.

Together with our strong balance sheet and cash flow generation, our credit facility provides us the needed capacity and flexibility to execute our strategic plan going forward. Please refer to our SEC filings for detailed discussions or factors affecting our results of operations including our Form 10-Q that we plan to file shortly.

Now I will update our guidance for 2014. We are reiterating our revenue guidance and expect total revenues to be between $144 million and $146 million. This represents annual total revenue growth between 2% and 4%.

We expect revenues from our higher margin product segment to increase in the mid to high single digits on a percentage basis for the full year of 2014. We expect tissue processing revenues to be down slightly through full year of 2014 compared to 2013.

We now expect R&D expenses to be between $9 million and $10 million in 2014, primarily reflecting our investments in our U.S. clinical trials for PerClot. We are raising our fully diluted earnings per share guidance with the full year 2014 to a range of $0.22 and $0.24, up from our previous range of between $0.17 and $0.20.

This includes the effects of the reduced R&D expense guidance, lower tax rate guidance, and the additional compensation expense related till the appointment of the new company President and CEO and other executive personal changes.

It is important to note that our guidance does not reflect activities related to business development which are difficult to predict. That concludes my comments and I’ll turn it back over to over Pat..

So at this point we’re going to go ahead and open up the lines for the Q&A session. Operator, could you come back on..

(Operator Instructions) And our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question..

Hi, Ashley and Pat, thanks for taking our questions..

Hello, Jeff..

How are you? I saw you jump around but I’m – for PhotoFix, did you make an upfront payment, and what was the amount, and was that made in the third quarter?.

No. We made an upfront payment to Genesee back in late first quarter, early second quarter of this year and that was approximately $0.25 million..

Got it.

Can you talk about ProCol, number of SKUs that you expect sizes, diameters and lengths?.

We’re going to have four. We’re going to have a – and they are all going to be 6 millimeters in diameter, in various lengths, 10, 25, 30, and 40 centimeter grafts..

10, 25, 30 and 40?.

Yes..

Okay.

You don’t expect longer than 40?.

No..

Okay.

So could you talk a little bit about the ProCol idea, it looks like you had a slight delay, could you talk about the protocol changes or the study design changes or reconsiderations that have been made?.

This is Pat.

So clearly the clinical trials and making sure you get your protocol, whether the FDA is happy with what you’ve got, we’ve actually had an IDE approval for quite a period of time, however there has been some items that they’ve wanted to kind of refine to make sure that when this is all said and done we’ve meet the requirements and we’ve got a trial that we feel good about, take it through the panel or through the PMA process.

So it’s really some final refinements around statistical plan, and this is a – the fact we’ve got multiple indications inside of one trial creates a little bit of complexity, so this trial is 324 patients, they are going to be cardiac patients, there is going to be urology patients and general surgery patients.

So I mean that’s really where this is all around, the statistical plan, and really making sure that we have buying from the FDA on what we’re going to perform with..

Okay.

Same number of centers expected?.

Yes..

Okay.

Could you talk about the CryoValve SG, if there is a transition for a Class III and PMA? What’s the current sales revenue now of the product on an annual basis or quarterly basis that you could talk about?.

It’s about $10 million to $11 million on an annual basis..

Okay.

So theoretically you may have an R&D done in roles over 20 or 30 months which should not affect the sales as it’s going on?.

Well that’s correct. This is actually a pretty complicated, I’ve been to 10 FDA panels, I’ve never been to a classification panel. I think the last classification panels were in the 70s. So this is a fairly unique panel because typically you bring a product to a panel and they evaluate the merits of that product and decide to approve or not approve.

This is very unique in a fact that they were there – the panel was there to discuss a whole class of products which is more than minimally manipulated tissue valves and/or homograft’s and we just happen to have the only product that’s approved. So it’s a little bit confusing I think.

Many of the panel members that voted said that they agreed that this category should move to a Class III but CryoLife, you guys should work to get this product approved, probably because we’ve got such great data. So the steps of the process on this reclassification are threefold.

Number one, the panel has made a recommendation of the FDA; they are purdue to decide what to do with that. My sense was that they will move this to a Class III recommendation, there will be a period of time for public comment, and once that’s done that will be in the next, probably, six to nine months.

We will then go and meet with the FDA and see what they are looking forward from us to go through the PMA process. As I commented in my comments, CryoLife has undergone a pretty extensive clinical program as a post market requirement to the original 510-K that they got back in the 2003-2004 timeframe.

That included 800 patients years follow up, that data is just being wrapped up, we showed the preliminary results at the panel meeting, and that will be finalized here by the end of the year. So our hope is that we’ve actually shown that this product is safe and effective, we’ve got 800 years of patient follow up.

My hope is that we can work with the agency to use our existing data to go forward with the PMA but we still have to have that conversation. But no matter what happens, this is going to be a three to four year process as we work through, kind of working with the agency..

Got it.

Just a couple of more if I may, any notable pricing changes for Q3 or Q4 expected?.

No, we had our last increase right at the very beginning of Q3 and there are none that are currently contemplated for the balance of the year..

Okay, one more. Could you talk about the appetite for acquisitions pipeline out there that you’re seeing for acquisitions on the BD front? And thanks, again..

Obviously one of the attractions to the company for me was, as I commented earlier, I’ve got a lot of experience in the cardiac and vascular space, I know the customers, I know the markets, I think at some degree that CryoLife has got an abundance of opportunities in directions we could go.

So part of what I’m going to be doing, I’m spending a lot of time in the field with customers, with our cardiac customers, our vascular customers.

But we also have unique technologies that are coming out in other spaces, so that’s going to be a process that I’ll be going through with the management team over the next three to six months on what is our strategic direction and where do we want to kind of double down on the M&A side because that’s one of the real appeals of the company is that we could really strong cardiac and vascular brand, good sales forces, and we’ve got cash flow and the opportunity with no debt to make acquisitions and there is a number of different things that I’m interested, I’m obviously not going to comment on what they are but I think there is a lot of different opportunities and we just have to figure out given the market dynamics, the competitive dynamics, what’s available, what’s in our price range, what fits, there is lots of things we have to go through and I’ve got a lot of experience, I’ve done 50-60 deals in my career.

So we’ll be looking at that but I’m obviously not going to share much more than that because – I’m not going to show my cards..

Okay. Guys, thanks very much for taking the questions..

Thank you..

Thank you. And our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question..

Good morning Pat and Ashley, thanks for taking my questions..

Hey Joe, good morning..

As far as the – the last caller touched on the PerClot IDE, I’m just wondering how should we look at the cost going forward, is there any material change from your outlook, prior to when we actually thought the trial would take place, how should we look at it?.

I think Ashley can comment further but I think the biggest difference is going to be, you see that our R&D spend has been light primarily because of the PerClot IDE has been delayed, again because of the working through the FDA.

So as soon as we get that trial, the protocol agreed to with the FDA and we started enrolling those expenses are going to go back up to what we anticipated them being this year..

Yes, I still think that we’re probably $5 million plus from fully completing the trial if we start enrolment in the first quarter, as anticipated there is a good chance that a significant portion of that is going to be spend or incurred during 2015 in regards to our full R&D spend for 2015 we’re going to have more to say about that and our year-end earnings conference call, that’s typically when we get our first look on what the guidance is going to be for 2015..

Okay. And then, I guess on BioGlue, Japan, you touched on it a little bit here with the indication, the hopes for approval, can you give us some sense of what the actual market opportunity would be like in Japan. I’m not sure if I caught that..

Yes, I will give you some specifics. The current indication gets a little bit technical but the current indication for BioGlue in Japan is for aortic dissections which is a very narrow application.

That is about $5 million opportunity and our partners there, the distributors there have actually done a nice job penetrating that because it’s a real need, it’s kind of life and death type product.

The other big applications for BioGlue in cardiac surgery in most of the markets around the world, we also have – that product can be used in complex aortic surgery, in cardiac surgery, as well as great vessel surgery. So it doubles the opportunity. So the current $5 million market probably goes then to $10 million range..

Okay. And then in terms of – I’m jumping around as well, in terms of the case with C.R.

Bard, when would you hope that this would be fully resolved? I know you can’t go into specific details but I know you said that January case date, are we assuming some resolution in January or is this thing going to be pushed out a couple of months?.

Yes, there is a date set for January – in the comments I made, Bard is going for preliminary injunctioning in the U.S. and that trial date is set for January. So we will get obviously an early read.

My own opinion is that this is – I think we’ve got a very strong case but I think when you look at the financials of the cost of a patent battle, for us and for them, from a business standpoint I just don’t think it makes sense to take this thing to trial.

Their patent runs out in February of 2019, we’re not going to commercialize PerClot surgical until 2017. So you can do the math, it just doesn’t make a lot of sense, so even if they won flat out and got a royalty, it doesn’t pay for their legal bill.

So I’m not sure why they would want to take this thing forward but we feel like we have a good case and we’ll take it forward but I just think it makes a lot more sense to settle this thing than it does to fight it out..

Okay. And then I guess my last question, on the tissue processing side of the business, I know you guys talked about that you had stopped shipments in EU earlier this year.

Any plans to reengage EU or is that segment you’re staying away from?.

Well we’ve had – I let Ashley comment because obviously just given my limited time here. We had looked at turning tissues back on if you will in Germany and Austria, and are going through the process to look at what that would entail.

So we’re kind of in the middle of that raid now but we’re not prepared to commit whether we’re going to do it or not, we’re just in the planning stage.

I don’t know if Ashley you want to add anything?.

No, I think that’s fair. We’re just going through the analysis right now and when we make a determination, we’ll let you know..

Okay. Thank you..

Thanks..

Thank you. And we have no further questions at this time. I would now like to turn the floor back to management for closing comments..

I appreciate everybody joining the call this morning.

As I commented, I’m very excited about what I see here from – we’ve got three nice product launches coming out of the gates, we’ve got some mid-term things coming, we’ve got some long term opportunities in the PerClot IDE trial, we’ve got a good sales force, and I think the ability to acquire into unique spaces that we can make a difference.

I’ve been here for two months and again, I’m very excited about what I see here and I look forward to working with our team here to take the business forward. So we look forward to giving you guys an update on the next call. Thanks for joining..

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..