Xtant Medical Holdings Inc (XTNT) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Bacterin International fourth-quarter and year-end 2014 results conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell, President of The Cockrell Group. Thank you, Mr. Cockrell; you may begin.

Thanks, Adam. And good morning and thank you for joining us today for the Bacterin fourth-quarter and year-end 2014 financial results conference call.

Joining me on the call today are Dan Goldberger Bacterin's Chief Executive Officer, and John Gandolfo, Chief Financial Officer. Yesterday afternoon the Company was pleased issue our press release announcing fourth-quarter and year-end 2014 results. Today's call is being webcast and will also include a slide presentation which has been posted to the Company's website. Following remarks by management, the call will be open to your questions, and we expect the duration of the call to be approximately one hour.

Now during the course of this call, management may make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect Bacterin's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believes, should, intends, and other words with similar meaning. Any such forward-looking statements are not guarantees of the Company's future performance and involve risks and uncertainties including those noted in the risk factors section of the Company's annual report on Form 10-K and the Company's quarterly reports on Form 10-Q. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call was held and recorded on Wednesday, March 18, 2015, at approximately 10 AM Eastern time. Since then, the Company may have made additional announcements related to the topics discussed herein. Please reference the Company's most recent press releases and current filings with the SEC. Bacterin declines any obligation to update these forward-looking statements except as required by applicable law.

With that, I would like to turn the call over to Dan.

Thank you, Rich. Thank you all for joining us. This is a very exciting time for Bacterin as we transition from a turnaround project to a revenue growth story. We have a lot of information to share with you this morning so let me just give you a quick rundown of the topics we're going to cover, and then John and I will go into a bit more detail on each one. On the financials, we'll be giving you an overview of both fourth-quarter and full-year 2014 performance as well as guidance for 2015.

I'll also spend a few minutes going over some new developments in the areas of sales, distribution, and products, and then I'll tell you about an investment that Aspire Capital has made with the Company as well as the status of our New York Stock Exchange MKT listing.

In addition, I'll let you know about our strategy for exiting two business lines that are no longer a good fit with our product portfolio.

So let's start with the numbers. I was thrilled by our previously announced 10% year-on-year revenue growth for the fourth quarter of 2014. We broke through $9 million to a record $9,081,000.

Slide 5 shows quarterly revenue growth since I joined the Company in August 2013. As you can see, fourth-quarter 2014 represents our fifth consecutive quarter of year-over-year growth.

As you know, we initially spent a few months stabilizing the business and, at that time, we saw low single-digit growth for Q4 2013 and Q1 2014. Melanie Head, our Vice President of Sales; and Bob Di Silvio, our President joined us in Q2 and Q3 2014, respectively, and promptly rebuilt our hybrid sales function. They've done a phenomenal job helping to accelerate revenue growth to 10% in the fourth quarter of 2014, and we expect continued acceleration in 2015.

Moving to slide number 6, you'll see our annual performance numbers. For the full year 2014, revenue grew approximately 7% to $35.3 million. Let me emphasize that our current business model is high-quality recurring end-user sales to hospitals.

You'll also notice our substantial improvement in gross margin, thanks to the hard work and dedication of our Chief Operating Officer Darrel Holmes and his team. We are forecasting 61% to 63% gross margin for 2015. John will discuss our operating results in more detail.

Before I move on to the next slide, I want to take a moment to thank the Donate Life organization and our recovery partners for the amazing work that they do. Our donor services team led by Rusty Morck has expanded our relationships with existing recovery agency partners and added two new relationships during 2014.

These organizations allow us to process and deliver the high-quality allografts that our physician customers have come to rely on.

Slide number 7 shows what we have to do to become profitable as measured by EBITDA. During 2014, our EBITDA loss averaged about $866,000 per quarter. With our current hybrid distribution model, incremental revenue has about a 50% flow-through the income statement.

Therefore, we need another $1,730,000 of revenue at 50% flow-through to achieve EBITDA breakeven or a $10.8 million revenue quarter. Our goal as a management team is to break through that $10.8 million revenue per quarter target to become profitable later this year. I'm confident we can do that and let me explain why.

First of all, our products, especially our flagship product OsteoSponge and our newly launched 3Demin cortical fiber constructs are absolutely outstanding. OsteoSponge and 3Demin are proprietary, highly differentiated products that offer our physician customers reliable clinical outcomes and superior handling characteristics.

In fact, the total market for these products to orthopedic surgeons and neurosurgeons represents about $410 million. That's a very large business opportunity.

Secondly, we've demonstrated success in establishing market share in cities where we have the right representation, contract access, and physician champions. I expect our market share will continue to increase as we add the right sales assets in key markets to our hybrid team.

The distribution contract with Spartan Medical that we announced last week is an excellent example of that expanded reach. And finally, our operations team has demonstrated the ability to ramp up recovery in processing while simultaneously improving margins.

Turning now to our sales function. Slide 8 shows our actual full-time field sales employee headcount from 2014 compared to our planned 2015 headcount. Our target of $315,000 of revenue per quarter, per full-time productive field sales employee is an important metric that we monitor carefully. We remain committed to our hybrid distribution channel strategy, and we'll continue to invest in adding full-time employees and manufacturer's reps throughout 2015.

The management challenge is to continue to add field assets while maintaining that productivity metric. We're constantly recruiting and upgrading our field sales personnel. To be blunt, we simply don't tolerate underachievement. This is the very nature of sales management, and we will weed out underperformers to make room for overachievers.

Since it takes 6 to 9 months for sales effort to become fully productive, the 33 productive reps projected in Q2 2015 and 36 productive reps for Q3 2015 have already been hired and are working their way up the productivity curve. In summary, a fully staffed field sales organization of 39 in the fourth quarter of 2015 at a conservative productivity of $300,000 of revenue per quarter per employee will put us above that EBITDA profitable run rate as we exit 2015 and roll into 2016. Our guidance for 2015 revenue is $40 million to $42 million.

In addition to increasing the number of sales assets we've deployed, we also have to be in the right places. Slide number 9 shows our geographic footprint in the 20 largest US cities. While our market share for demineralized bone matrix products is approximately 6% nationwide, we have pockets of strength in Arizona, San Diego, Las Vegas, and Seattle, and weaknesses in certain other cities.

We have a variety of tactics to continue growing in cities where we are already doing well while simultaneously colonizing cities like Houston, Minneapolis, and Boston where we have untapped potential. In addition to our geographic sales strategy, we also made two important sales and distribution announcements in the past week.

On March 10, we announced a new distribution agreement with Spartan Medical that will give us access to the federal government medical centers and major military treatment facilities. Traditional orthopedic products generate 15% to 20% of their US revenue from government and military hospitals, but Bacterin historically has generated little or no business from this category.

And this week, we announced renewal of our contract with Novation. Under Bob and Melanie's leadership, we continue to have great success gaining contractual access to a variety of regional and national channels. These activities make our field sales assets more productive and open new market opportunities for us.

Now, I want to share some new product news. We increased our investments in R&D during 2014 in an effort to return Bacterin to its innovation roots. Greg Juda, PhD; Todd Meyer; and the rest of our R&D team have done an outstanding job of that.

Slide 10 shows our patent pending 3Demin cortical fibers that we launched towards the end of 2014. These fibers are processed by us with a proprietary technology. They can be used as is, but our surgeon customers are intrigued by our ability to mold those fibers into arbitrarily large sheets and strips and even to use them in a 3D printing technique to create unique shapes.

This product family has generated more than $250,000 in revenues since it was introduced, making it the most successful launch in Bacterin's history. We have two new product launches is scheduled for 2015. One of those products will be indicated the general orthopedic use while the other is directed towards a specific foot and ankle procedure. Our R&D team has a robust product pipeline scheduled for 2016 and beyond that will continue to add our orthopedics catalog.

In addition to our own developments, we are evaluating a number of acquisition opportunities that would leverage our regenerative medicine focus and our rapidly growing distribution capability that calls on orthopedic and neurosurgeons.

I mentioned at the start of the call that I wanted to give you an update on the status of our New York Stock Exchange MKT listing. We are continuing to appeal the exchanges decisions around our listing status. Our shareholder equity does not currently meet the NYSE and MKT minimum requirements, so we are exploring several structures that would resolve the shareholder equity deficiency, including the possibility of an accretive acquisition or merger.

We are very pleased that Aspire Capital has chosen to make an investment in Bacterin which was announced yesterday. We believe that Aspire will be an excellent long-term investor will to provide working capital for our future growth. Aspire has agreed to invest $750,000 in restricted stock and up to an additional $9,250,000 in the form of an aftermarket structure. Under this agreement, the Company at its sole discretion can put common stock to Aspire and return for cash over a two-year period.

Management is confident that the plan we have described above to reach profitability can be implemented without any additional investment. We believe that the relationship with Aspire will provide the Company with the most flexibility to run the business with minimum dilution to existing stockholders.

Finally, I'd like to discuss the two lines of business that we have chosen to exit. Bacterin started as a coatings business but quickly discovered that there is no efficient way to enter that market.

My predecessor wisely moved the Company to biologics where our business thrives today. We've identified an entity that has expressed interest in the coating business and underlying technology, and those negotiations are ongoing.

Bacterin acquired a line of hardware specifically for cranio-maxillofacial fixation procedures, CMF procedures, in 2011 but quickly discovered that we don't have an effective distribution channel for that procedure. The previous owner of the product line has agreed to take over the existing inventory.

I believe that discontinuation of these two businesses will reduce distractions and streamline our business by allowing us to further focus on our biologics. With that, I'll turn it over to John to discuss our financial performance in detail.

Thank you, Dan. I'd like to remind our listeners to refer to the fourth-quarter 2014 earnings press release issued yesterday. And also our Form 10-K for the year ended December 31, 2014, which will be filed in the near future. I will review revenue, gross profit, gross margin, and EBITDA numbers that Dan mentioned in his opening in more detail, as well as ago over sales and marketing expenses, G&A, loss from operations both before and after impairment and net loss as well as give guidance for 2015 and discuss the Aspire Capital investment as part of our financial liquidity.

Fourth-quarter 2014 revenue was approximately $9.08 million an increase of 10% compared to approximately $8.26 million for the same period during 2013. Sequentially, fourth-quarter 2014 revenue increased 7.4% over third-quarter 2014 revenue of $8.45 million.

The reported fourth-quarter 2014 revenue figure represents the fifth consecutive quarter of increased year-over-year revenue growth since August 2013. Revenue for the full year 2014 was approximately $35.3 million compared to approximately $33.1 million reported for full-year 2013, representing an increase of 6.8% over the prior year. Gross profit for the fourth quarter of 2014 was $5.8 million or 63.5% of revenues and this compares to $4.1 million or 49% of revenues for the fourth quarter of 2013.

For the year, gross profit was approximately $22.3 million compared to $18.9 million in 2013. Gross margin for the year was 63.1%, which compares to a gross margin of 57.1% reported for 2013. The increase in gross profit and gross margins are the result of an increased focus on operations, which has yielded improve manufacturing efficiencies. Although the Company continues to report gross margins in excess of previously stated guidance and believes that there may be some upside, we are keeping the gross margin expectation for 2015 between 61% and 63%.

Fourth-quarter 2014 sales and marketing expenses increased to $4.5 million as compared to $4 million during the same period in 2013. For the quarter, sales and marketing as a percentage of revenues increased to 49.8% compared to 48% in the fourth quarter of 2013 due to increases in sales and marketing headcount.

Full-year 2014 sales and marketing expenses increased to $16.9 million as compared to $16 million for 2013. As a percentage of revenues, sales and marketing expenses decreased to 47.9% compared to 48.4% reported for the full-year 2013.

In the fourth quarter, general and administrative expenses decreased to $2.2 million as compared to $2.6 million reported for the same period last year. As a percentage of revenues, general and administrative expenses were 24.5% during the period as compared to 30.9% for the same period of 2013.

Full-year 2014 G&A expenses decreased to $8.9 million as compared to $10.2 million reported for the same period last year. As a percentage of revenues, G&A expenses were 25.2% as compared to 30.9% for 2013.

The fourth quarter 2014 loss from operations before impairment was approximately $1.6 million compared to approximately $2.8 million in the fourth quarter of 2013. Full-year 2014 loss from operations before impairment was approximately $5.4 million compared to a 2013 loss from operations before impairment of approximately $8.3 million.

During the fourth quarter of 2014, the Company made a strategic decision to discontinue with CMF and coatings product lines since they are not integral to the Company's core strategy and represents an immaterial portion of the Company's current revenue stream.

In connection with this decision, the Company reported a one-time non-recurring impairment charge of approximately $913,000 during the fourth quarter of 2014. In the fourth quarter of 2013, the Company recorded an impairment charge of approximately $729,000 associated with the write-off of goodwill from a previous acquisition.

The fourth-quarter 2014 loss from operations after impairment was approximately $2.5 million compared to $3.6 million for the prior-year. For full-year 2014, the Company reported an operating loss after impairment of approximately $6.3 million compared to $9 million for 2013. The reported fourth-quarter 2014 net loss was $3.3 million; this compares to a year ago period net loss of $4.2 million.

For the full year, 2014 the Company reported a net loss of $10.5 million compared to $12.7 million loss for 2013. Net loss per share for the full year 2014 was $1.76 a share compared to a net loss per share of $2.80 for 2013. The Company defines EBITDA as net income loss from operations before depreciation, amortization, impairment charges, and non-cash stock-based compensation.

EBITDA for the fourth quarter of 2014 was a loss of $1.1 million compared to a loss of $1.6 million for the same period 2013. Full-year 2014 EBITDA was a loss of $3.5 million compared to an EBITDA loss of $5.8 million in the prior year.

Cash, cash equivalents and net accounts receivables were $8.9 million on December 31, 2014. In addition, as we announced yesterday, the Company entered into a common stock purchase agreement with Aspire Capital Fund, LLC, a Chicago-based investment fund.

The agreement provides that once the Company receives additional listing approval from the NYSE market, Aspire Capital will purchase $750,000 of unregistered common stock at $3.62 per share, the closing price on March 13, 2015. The Company can from time to time elect to sell to Aspire up to $10 million of common shares over a two-year period.

The sales price of the common shares purchased by Aspire will be based upon the market price of our common stock at the time of each sale. The Company may not sell any additional shares to Aspire until a registration statement related to the transaction has been declared effective by the SEC.

There were no warrants issued in connection with this transaction, and we believe the agreement with Aspire provides flexibility in obtaining working capital under terms which are less dilutive to common shareholders compared to other available options at this time.

We do not presently intend to sell any additional shares to Aspire Capital, and we believe the current cash resources and potential cash proceeds from the Aspire agreement should provide adequate capital to fund the operations throughout the term of the agreement.

Based on the anticipated growth of the Company's salesforce and improved productivity from tenured sales reps combined with the current sales pipeline, we anticipate 2015 full-year revenue to be in the range of $40 million to $42 million. This suggests a year-over-year growth rate in the range of 13% to 19% for 2015 compared to 2014.

Now, I'd like to turn the call back over to Dan.

Thank you, John. Before we open it up for questions, I just want to say it's been an exciting and productive year. We finished the important groundwork and now have a solid foundation for accelerating growth in 2015 and beyond. Our growing team of field sales assets and new products, both commercialized and in the pipeline, are paving the path towards EBITDA profitability.

I look forward to leading this Company to the next level. Thank you for your support and interest. And with that, let's go to questions.

(Operator Instructions) Suraj Kalia, Northland.

Congratulations on a nice quarter and congratulations your guidance. Long time coming, hopefully better days ahead.

We agree.

So Dan and John let me start out here. If I remember correctly, this is the first time you have given revenue guidance and obviously that suggests a certain level of confidence as we are moving forward. Is it safe for me to say that the ship has stabilized now and we should start looking at, quote-unquote, year-over-year growth every quarter?

I'm trying to figure out how should we -- now that you'll have provided guidance and the guidance is more than consensus, how should we look at the cadence of numbers, especially from a housekeeping perspective?

So thanks, Suraj, excellent question. This is -- since I joined the Company, this is the beginning of the management team providing guidance. And our comfort in providing guidance represents the fact that we now have a track record of working with the business model.

By that I mean, we have figured out what we have to do with our distribution channel in terms of contract access and the right kinds of employees and sales agents to bring to bear in any given city. So now that we've proved the business model, if you will, we've got increasing confidence that we can continue to invest in the distribution channel and improve productivity and gain better visibility on incremental revenue.

In parallel with that, we had the successful product launch of the 3Demin cortical fibers, and I am very excited about the two product launches that we have scheduled for 2015.

There's still some seasonality to the business, which is why we emphasize year-on-year growth as opposed to sequential, but I'm very excited about the team and the people that are joining us and our visibility into acceleration in 2015.

Dan, one of the things I heard and forgive me if I didn't get the numbers right, I thought I heard there were 39 reps, direct reps, on hand, and this would be the number of that we would still be exiting fiscal 2015. So essentially, the way I interpret this, with the increased guidance is the burn related to the number of reps on hand is approximately going to remain stable, but you're probably looking at increasing productivity.

Did I get the math right on the numbers and the way I'm thinking through this, or are you looking at that more?

Not exactly, if you look at slide number 8 I believe it was, we are adding approximately three full-time employees per quarter each quarter in 2015, and the expense of those employees, roughly half of it is fixed in salary and the other half is variable compensation commissions. So, the sales expense will be increasing slightly through the year.

That said because it takes 6 to 9 months for a new asset to become productive, the 36 that we have programmed for the third quarter are already on the payroll. So you will see some small increase.

You ought to model some small increase in the sales expense as you roll through 2015 and into 2016 representing our ongoing investment into that channel development.

I think some of the confusion is that on slide 8 that issuing productive sales reps. So at the end of the year we anticipate to be exiting the year with 39 productive sales reps. There might be 48 full sales reps hired by the Company at that point in time, some of which have not yet met productivity by our definition.

Right. Fair enough, okay. Dan, did you mention the businesses -- the two product lines that you are exiting, what was the total dollar amount impact that you going to take because of exiting that business. I'm just trying to see that $40 million to $42 million is guidance. Had those business lines still been in there, what was the impact? And just do a year-over-year comparison, in fiscal 2014 if you remove those two lines of business versus fiscal 2015 guidance, what is the incremental growth here we are talking about?

Those businesses represented $400,000 and $500,000 per year of revenues combined basis. So it was not material to the Company's revenue stream certainly. The question you have with respect to -- I think you had a question about what the expense related to it was? We -- I think I mentioned that there was a one-time nonrecurring impairment charge of $912,000 that we reported in the fourth quarter associated with exiting it.

Fair enough. And the final question, Dan, I guess are you comfortable now looks like that the ship has stabilized. Our understanding is that the revenues per case are, give or take, in the range of $2,000 per case. Where do you think exiting fiscal 2015, you think we could be to generate organic productivity. Thank you for taking my questions.

No, certainly, and absolutely not only has the business stabilized and the underpinnings of the business have been strengthened, we are now growing and I'm looking towards accelerating growth because of the new product launches and the additional headcount that we are adding.

We have seen throughout 2014, we saw steady increases in our revenue per procedure and we saw -- actually, I believe for the full year our average productivity was more like $330,000, $340,000 per productive sales rep per quarter. So the management challenge is to add those sales assets and maintain their productivity of above $300,000 per rep per quarter. And now that we've got the model down and have demonstrated success in recruitment, I'm increasingly confident that we are going to meet or exceed those metrics.

Gentlemen, congrats again.

Thanks, thanks for your support.

RK, HC Wainwright.

Good morning, Dan and John. Congratulations on a great year and obviously, a good quarter as well. I have a few questions.

So, I apologize that some of this has been told during your opening remarks because I joined the call a little late. Thinking about the market as such and we all understand there is some market dynamic shift going on, especially with Integra trying to divest C-spine as separate entity. And I would think that there will be some kind of market -- marketing issues at least for that Company.

So how is that helpful for you to grow your market share and go beyond the current or at least the 2013 6% number that we have heard in terms of market share?

So that's an excellent question, RK. Any time there is disruption among the larger players that creates opportunities for a nimble, direct sales activity like ours both in terms of uncertainty at the customer level but also in our ability to recruit sales assets to our Company.

So we see this external dynamics -- the C-spine spinoff, the Biomet-Zimmer relationship, the Wright Medical-Tornier combination. All of those larger mergers are creating opportunities for us to enter into hospitals where we have not historically had contracts to recruit sales, assets, or both.

Thank you. And coming to some of the announcements that you made in the last week regarding Spartan and the GPO extension that you realized. Particularly on the GPO extension, we understand that that particular GPO is contributing about 25% or so of your revenue.

Now that this extension is -- does this mean it's a bigger vote of confidence for you from the GPO, or is this just standard business? Where do you want the contribution from that source to go with this new extension?

So that's a very good point. This is a profound vote of confidence from Novation, one of the largest national group purchasing organizations. And not only do the contractual terms create additional opportunities for us, we are gaining increasing access to some of the sales resources at Novation.

By that I mean instead of being a passive relationship, the sales team at Novation is helping our team actively open up new hospitals or introducing us actively to new physicians. And that's a very powerful force combination.

Yes, that's what I would think, and I think that it -- I would consider it as a success for the management, as well, to keep that going.

Moving on to the $10.8 million breakeven target that you have for yourself, which is asking for almost a 19% growth compared to the $9.1 million that you just announced in the fourth quarter. And also at the same time, we are reading a statement saying that we're not looking for additional investment.

So is this all the contribution, that 90% growth, is it all coming just from the maturity of salesforce and also the growth of the product, or is there something else that we are not seeing especially the new introductions that you will be making into 2015. So what are the angles of that 90%?

So we believe that the 19% sequential growth, if you will, from $9.1 million on our previous quarter to $10.8 million, we believe that can be achieved with our existing resources -- by that I mean the sales employees that have already been hired but may need to mature and become productive over the course of 2015, and our existing product portfolio.

The new products that we launched, especially 3Demin have been an upside surprise, and that would be upside to our internal projections as well as the product launches that we have scheduled for 2015. Those were not programming a lot of revenue in 2015 from those product lines. But if those launches are as successful as the 3Demin launch has been, then again that's upside opportunity for us to outperform.

That's good. One last question, this is on the Spartan business. It looks like you are actually entering into kind of a niche market, and I'm getting (multiple speakers).

It's a big niche.

(laughter) Getting into the VA system is not an easy task. So, could you comment on what you're expecting from this? What, when, how kind of question.

So strategically, when I first joined the Company I identified one of our weaknesses was relationships with government and military facilities. Bob Di Silvio took the lead on getting the Company positioned to enter into those markets. We believe that ultimately 20% of our revenues should be coming from those channels, but it's going to take time to get there. I think that's a three-year goal that the Company has 20% of its revenue coming from those channels.

There will be some close-in short-term wins, but this is a marathon. Working with the government, working with the military is a long-term strategy.

Excellent. Congratulations again and I'll talk to you soon.

All right. Thank you so much for your support.

John Vandermosten, Singular Research.

Thanks for the opportunity to ask a few questions. First, I just wanted to explore a little bit more the exit from the CMF and coatings business. Are you expecting some cost savings from this exit?

I wouldn't say cost savings but the revenue that John identified, $400,000 or $500,000 last year, was at very, very low gross margins. So we'll get some benefit in our blended gross margins but it's a small lever.

Okay and that $913,000 right off, that was inventory related or were there assets that were associated with those businesses that -- also written down?

It was probably 90% of it was inventory related but the balance might have been some related equipment.

And are you expecting -- I know you said you're going to transition these lines back to their original owners. Are you going to expect any -- some kind of cash flow from that transition at all when it happens?

I think that there will be some cash flow but it's going to be immaterial to the Company's operations. So I wouldn't certainly model anything in from that vantage point.

Okay, okay. And just on the salesforce side of things, the bonus payments for sales. Does that happen when the sales is made, or does it happen in line with the sales cadence, or does it happen after the sale is complete? I'm just joined get an idea of when we'll see revenues and when we'll see expenses flow through. Is it more simultaneous; is there a lead or lag on that?

I think you're talking about commissions, not bonuses.

Correct, right, yes, exactly.

So the commissions are earned when we invoice the customer. They are paid on collections, but they hit the income statement when they are earned which is --

They are accrued.

Which is simultaneously with the invoiced revenue.

And you helped with this a little bit on some of the slides where you were going into the breakeven margin and everything. But I guess what should we see in terms of relationship between top-line growth and growth in sales and marketing costs? Is it may be 50% of top line for sales and marketing growth or is there -- what kind of relationship should we expect to see?

So for incremental revenue after we've absorbed all of the fixed expenses, it's -- the marginal cost of sales is 18% to 20%.

Okay. And on the Spartan, when do you expect the first revenues to come in from this. I know we don't know quite how much they'll be or how long it'll take to get to the 20% or 25% target, but when do you anticipate first revenues to start hitting the top line?

We'll have some small wins in the current quarter, but the material revenue will be in the back half of the year.

Okay. And just final question, you may have mentioned this but I missed it. Just the current number of reps, not active reps, the total reps that you have as of the first quarter?

We had 38 full-time employees as we exited 2014.

Okay and (multiple speakers).

On salary.

Okay, 38 on salary, and you have about what 41 right now currently on salary?

Correct, correct.

All right. Thank you both so much for the help, and great to hear the positive top-line guidance. And thank you for your time.

Thank you, sir. Have a good day.

(Operator Instructions) Brian Novelline, DRW Investors.

I just wanted to try to understand. So how do you work through the regulatory since you have this shareholder equity problem and you need to get through that to get the equity infusion. It seems like you are -- it's kind of a tricky situation. So help me understand how that approval might come without getting the infusion?

Well, we can't comment too freely because we are in an appeals process right now. But the straightforward approach of selling a bunch of common stock to try and resolve that deficiency is one that we have decided not to follow. As I alluded to in our remarks, we are looking at a possible merger or acquisition transaction that would substantially rebuild our balance sheet.

Got it, so is there a timing for the appeals process?

There is not a specific calendar, no.

And so to the extent you don't get that specific listing result, the Aspire deal won't take place but you'd still have the option of executing a merger or some sort of transaction. So that would be kind of -- so it's sort of two paths. And if you don't get the listing, the Aspire equity is not available to you?

No, not exactly. The Aspire transaction, because we are currently listed on the NYSE, is subject to the approval of the NYSE for that transaction. So maybe the confusion is the approval of the NYSE. They were approving the transaction with Aspire within next week based upon that schedule. The approval is not contingent upon the listing being approved by NYSE.

Got it, okay, that's helpful. And is there any more color with regard to kind of the environment and anything you can say with regard to the acquisitions you're looking at?

Not at this time.

(laughter) that's sounds right. Okay, appreciate it.

Todd Robbins, Robbins Capital Management.

Well, you certainly accomplished a great deal, Dan and John. You're both to be congratulated. I think this is the best conference call I've heard from Bacterin, and I think the accomplishments you've made on sales and product and financial sides are terrific.

I was just curious, within I don't know three or four years without any kind of a suggestion of a price increase for your products, how do you guys come out on that thought and would it be appropriate to think about some kind of a price increase given your discount to your comparable competitors?

That's a great question, Todd. And as a matter fact, we actually did raise prices on January 1 of this year. Given the delicacies of our marketplaces, it's not something that we broadcast to the financial community. But we had a very effective price increase at the first of this year that's rippling through our various contractual obligations.

Would I characterize that as something in the single-digit category?

On certain product lines it was much more substantial than that. And on other product lines, which, frankly, are smaller revenue contributions, it's single digit.

I'd just like to add, though, Todd, the yield from that will likely be single-digit because a lot of the reimbursement comes through contractual arrangements. If you put through a 10% price increase, to give you an example, you might only get a yield of 4% to 5% on that because of contractual relationships.

That's really helpful. John, shouldn't that give us some cushion or some lift to the gross margin assumptions you are using?

Yes, I mean I think that, as I mentioned in the release, we do believe that there some upside to the guidance we've given. We, just for the time being, want to remain somewhat conservative and keep it at that 61% to 63% level. But there is definitely a little upside that we believe we might be able to accomplish.

That's terrific. Okay, thank you both very much.

Thank you, ladies and gentlemen there are no further questions at this time. I would like to turn the floor back over to management for closing marks.

Thank you, thank you all for taking time to listen to our reports this morning. We are looking forward to great things in the rest of the year. Have a good day.

Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.