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Solta Medical, Inc (NASDAQ:SLTM)

Q2 2013 Earnings Call

August 6, 2013, 4:30 PM ET

Executives

Jenifer Kirtland - Investor Relations, EVC Group

Mark Sieczkarek - Chairman, Interim President and Chief Executive Officer

John Glenn - Chief Financial Officer

Analysts

Bill Plovanic - Canaccord

Richard Newitter - Leerink Swann

Chris Lewis - ROTH Capital Partners

Jeremy Feffer - Cantor Fitzgerald

Konstantin Tcherepachenets - Raymond James

Keay Nakae - Ascendiant Capital

Anthony Vendetti - Maxim Group

Operator

Welcome to the Solta Medical second quarter fiscal 2013 financial results conference call. (Operator Instructions) At this time, I would like to turn the conference over to Jenifer Kirtland of EVC Group. Please go ahead, ma'am.

Jenifer Kirtland

Good afternoon, everyone. Today after the market closed, Solta released its second quarter 2013 financial results and announced the change in leadership. The release is available on the Investor Relations section of Solta Medical's website at solta.com and with our Form 8-K filed with the SEC.

Before we get started, during the course of this conference call, the company will make projections and may make other statements about the company's business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

A detailed discussion of the risks and uncertainties that affect our business is contained in the company's SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Solta Medical website. The company's projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. The company does not undertake to update any projection or forward-looking statement.

In addition, to supplement the GAAP numbers, we have provided non-GAAP gross margin, operating income and loss, EBITDA, net income and loss and non-GAAP income and loss per share information that excludes the impact of non-cash acquisition related charges and other acquisition related charges and non-cash stock-based compensation charges.

We believe that these non-GAAP numbers provides you with insight to conduct a more meaningful and consistent comparison of our ongoing operating results and trends, compared with historical results. A table reconciling the GAAP financial information to the non-GAAP information is included in our financial results release.

And with that, I'd like to turn the call over to Mark Sieczkarek, Interim President and CEO of Solta Medical.

Mark Sieczkarek

Thank you, Jennifer, and good afternoon, everyone. With me today is our Chief Financial Officer, Jack Glenn. Now, this afternoon we would like to cover three topics with you. First, we'll discuss our second quarter financial performance. Secondly, we'll discuss the change in leadership that we've announced this afternoon. And third, we'll outline our strategy to build shareholder value going forward, while the board conducts a search for a permanent CEO.

Now, our second quarter was a disappointment. We didn't achieve the topline growth we expected, and to be frank, the outlook for the remainder of the year is unacceptable. Solta has built a portfolio of brands that are respective leaders in their categories, Thermage, Liposonix, Fraxel, Clear and Brilliant, Isolaz, VASER. And each of these brands capitalizes on a business mile that generates recurring revenue at a rate far higher than anyone else in our industry.

At the same time, each of these brands generate better results and returns for our customers, where the physicians buying our systems, tips and supplies. They also provide better results for their patients. What we haven't done is to convert the superior business model to higher revenue growth and good returns for our shareholders. The changes we are announcing today are expected to accelerate, achieving this priority.

So at this point, I'd like to turn the call over to Jack Glenn, to review the second quarter financial performance. Jack?

John Glenn

Thanks Mark. Given that our financial details were released this afternoon, I'd like to focus my comment today on key elements of our second quarter results. Our revenue growth is 16% in the second quarter as compared to the year ago period, was primarily attributable to sales of VASER systems and product from the February acquisition of Sound Surgical Technologies.

International revenue from sales of our other product lines increased 23% during the second quarter. However, domestic system revenue declined compared to last year, primarily due to the decision to match competitive pricing.

To providing more complete picture of our second quarter revenue, I'd like to briefly review the performance of each major brand. Thermage is our largest and most profitable brand. In the second quarter, unit system sales of Thermage grew by more than 50% year-over-year and total revenue increased by approximately 20% worldwide.

In North America, the placement of new systems grew 75% over the second quarter of 2012, and in international market the placement of new systems grew by over 40% as compared to the second quarter of 2012. However, this gain was offset by an approximately 20% decline in the average sales price of Thermage systems, as we moved to respond to the aggressive pricing of a competitor.

Both units and revenue from sales of Thermage treatment tips increased with tip revenue growing more than 20% year-over-year. Average sales prices on Thermage treatment tips were up slightly over the year ago period. The new total tip introduced earlier this year has been a major factor in our strong Thermage tip revenue performance in the second quarter.

With the total tip and achievement of our internal R&D effort, doctors and their patients see much improved skin tightening results in the face, jaw, neck and other body areas right off the table as compared to other competitive treatments. Because of the strong demand, we increased total tip production threefold during the quarter. Due to its success the total tip is helping to reinvigorate our installed base and gain new accounts.

Now, turning to Liposonix. We placed a record number of new systems, higher than any quarter since we launched second generation platform in January 2012 and approximately 10% more versus the second quarter of last year. However, the average sales price in the U.S. declined by an average of approximately 25%, as we reacted to competitive pricing pressures. As a result, Liposonix generated lower revenues than we had anticipated.

The Liposonix tip production issue that affected the first quarter have been fully resolved and we did see the growth internationally in the second quarter and benefited from regulatory clearances in Singapore, Brazil and Taiwan. The pricing pressure did not affect international markets for Liposonix because sales there are primarily through distributors and we have not seen the same level of competitive presence outside of North America. Total revenue from Liposonix treatment kit in the quarter rose by 10% from the same period last year.

Turning to Fraxel and Clear and Brilliant, which combined represent our operating in the skin resurfacing market, revenue grew at combined 5% as compared to the second quarter of 2012. Year-over-year revenue from skin resurfacing systems was flat, but unit sales grew up 6% year-over-year driven by our lower price in Clear and Brilliant systems. Total revenue from Fraxel, and Clear and Brilliant treatment tips rose 11% from the second quarter of last year.

Finally, regarding the VASER product line. We stabilized the sales force in the second quarter and integrated the remainder of the business. We are also beginning to make progress on the cross-selling opportunities we see for the Solta brands with the VASER installed base. VASER sales were down slightly as compared to those generated by Sound Surgical in the second quarter of 2012.

Turning now to some additional key revenue metrics. Q2 of 2013 revenue by major category was as follows: systems of $19 million, tips and other consumables of $22.3 million, and service and other revenue $1.9 million. The geographic split of revenue was North America 46%, and international 54% as compared to a 52% North America and 48% international split for Q2 of last year.

Gross margin for the quarter was $26.1 million or 60% of revenue and it includes $1.9 million of amortization, acquisition related charges, and stock-based compensation charges. Excluding these charges, the gross profit for the quarter was approximately $28 million or 65% of revenue.

The comparable gross profit for Q2 2012 was approximately $25.1 million or 67% of revenue. The decrease year-over-year in gross margin as a percent of revenue was primarily due to the pricing pressures on Liposonix and Thermage systems as well as a larger proportion of revenue in the current year quarter, realized from international distributor channels.

Operating expenses for the quarter were $19.2 million compared to $49.3 million in Q2 2012. Solta Medical's GAAP results for the second quarter included $9.5 million of credit for the value reassessment of the expected earn out payments associated with the acquisitions of Liposonix and Sound Surgical as well as amortization and other acquisition related charges and stock-based compensation charges of $4.9 million.

Excluding these items, Q2 2013 operating expenses increased by $3.9 million to $25.7 million versus $21.8 million in the prior year period. The year-over-year increase was primarily attributable to the acquisition of Sound Surgical and in accruals of approximately $320,000 for U.S. medical device taxes.

GAAP net income for the quarter was $3.8 million as compared to a net loss of $26.3 million reported for the second quarter of 2012. The GAAP net income for the current quarter includes a non-cash tax provision of approximately $2.1 million related to the reassessment of the expected earn out payment associated with the acquisition of Liposonix and Sound Surgical.

The results for the quarter also included $2.1 million non-cash income tax expense related to the reduction of tax deductible contingent consideration. Non-GAAP net income for the quarter was $1.3 million or $0.02 per diluted share, as compared to non-GAAP net income of $2.7 million or $0.04 per diluted share for the same period last year.

Now, turning to the balance sheet. As of June 30, our cash balance was $16.3 million and the company had additional resources available of $4 million through revolving credit facility with Silicon Valley Bank. Total bank debt at the end of Q2 stood at $31.3 million.

The company also announced they really had executed a commitment letter to restructure and expand its credit facility with Silicon Valley Bank to a total of $42 million. The terms of the revised credit facility expands the amount of term debt by approximately $5 million to $27 million. The company has the opportunity to increase the facility by an additional $3 million to a total of $30 million, if certain profitability criteria are met prior to June 30, 2014.

The first year of the term debt calls for interest-only payments after which the debt will be amortized over a period of 30 months. Funds available through the revolving credit facility with the bank are to remain unchanged at a total of $12 million. This provides ample liquidity to meet our foreseeable operating needs.

With regards to our contingent liability related to the acquisitions of Liposonix and Sound Surgical, as of June 30, we had remaining short-term contingent liability of approximately $5.3 million related to 2012 year-over-year increase in Liposonix transducer revenue, and the year-over-year increase in gross profit from Liposonix systems.

We expect to make the final payment of the balance owed $5.3 million in October of this year. We expect the contingent payments related to both acquisitions to be made in 2014 related to the full year 2013 projected result to be approximately $6 million. Plus, the balance sheet at the end of the quarter showed a total of $11.1 million for the current liability portions of the contingent considerations.

Inventory levels at $21.8 million rose from yearend 2012 by $5.1 million due to the acquisition of Sound Surgical and lower than expected sales of capital equipment in the quarter. Inventory turns for the quarter improved to 2.8 compared to the 2.4 turns, we reported for the prior quarter.

Day sales outstanding for the quarter were at 52 days, up slightly from the previous quarter's 51 days, due to a large proportion of sales in the quarter due to distributors, with net 60 day payment terms as compared to typical net 30 day terms in the North American market.

I'd now like to offer our update on the financial outlook for 2013. While we expect to generate positive results across our product lines in North America and internationally for the remainder of the year, based on the initiatives that Mark will discuss shortly, the first half performance and the competitive environment in North America over the short-term has led us to revise our outlook for the full year as follows.

We now expect revenue for the full year 2013 to be approximately $165 million, representing year-over-year revenues growth of approximately $20 million or 14% compared to full year 2012 revenue of $144.5 million. We previously provided a revenue outlook for 2013 of $180 million.

Our outlook for non-GAAP gross margin is expected to be approximately 65% for the full year 2013. We previously provided an outlook for non-GAAP gross margin in the range of 65% to 68%. Non-GAAP gross margin excludes non-cash amortization charges, non-cash stock-based compensation charges, severance cost and acquisition related adjustments. Non-GAAP gross margin for the first six months of 2013 was 66%.

Our outlook for non-GAAP operating income is expected to be approximately $10 million for the full years 2013, representing a year-over-year increase of approximately $2 million or 20% as compared to $8.4 million for full year 2012. We previously provided a non-GAAP operating income outlook for 2013 in a range of $13 million to $16 million for the year. Non-GAAP operating income excludes non-cash amortization charges, non-cash stock-based compensation charges, severance cost and acquisition related adjustments. Non-GAAP operating income for the first six month of 2013 was $2.4 million.

With that, I'll turn the call back over to Mark.

Mark Sieczkarek

Thanks Jack. As we entered 2013 and we're completing our acquisition phase, the business emphasis was fully placed and continuing to focus on leveraging our synergistic brands and infrastructure into a strong improvement on shareholder return, and specifically the bottomline. Clearly, the disappointing financial results today and our revised outlook for 2013, illustrate the need for a revised approach to the marketplace to increase growth and build returns for our shareholders.

Now, during this year the board has analyzed Solta's product line, competitive position and operational execution. We concluded that, first, our product line is broad and one of the best in the industry, but we haven't fully demonstrated in the marketplace the superior attribute of Solta's products.

Now, our unique business model positions us to generate the majority of our revenue from recurring tip and disposable sales. Our international business is solid and it has a potential for continued consistent profitable growth. We've also had an higher than desirable sales force turnover.

Our North American business is underachieving and our plans to regain momentum were not in an acceptable rate. And finally, we have some key growth opportunities in the second half to the year that we must fully capitalize at. These opportunities include the expansion of VASER internationally, the demand that the total tip is generating for Thermage, and additional outside-U.S. regulatory approvals for Solta products, and the global warrants of Isolaz 2.

Now, in order to maximize shareholder returns from these opportunities, the board decided to begin a new chapter in Solta's history. Steve Fanning was in Solta since 2005, and under his leadership the company became a leader and a strong competitor in the aesthetics industry. The entire board thanks Steve for his years of dedicated service for Solta and for his many contributions for the company's leadership position and building the strong brand portfolio. We wish him well in his future endeavors.

Now, our efforts over the short-term will be characterized by focus and aggressiveness. I'm not kind going to give you, over the competition, our playbook today. I will tell you that we're going to be aggressive in placing our capital equipment. We believe that the opportunity to further leverage our gross margin is strong, and our objective is that ultimately system placements results in higher tip and disposable revenue growth.

During the first half of 2013, we implemented reductions in operating expenses, which are expected to benefit second half profitability. At the same time, we need to continue to realign our spending in the North American markets toward improved sales execution, especially with systems. With increased system revenue in North America, we believe we cannot only grow, but also enhance our operating efficiency to favorably impact the bottomline.

Our goal then is to take the appropriate actions to begin generating results from these strategies, beginning now and into 2014. The guidance we've offered today reflects an outlook, based on the performance during the first half of 2013 and the pricing environment we faced through the end of July.

In terms of the leadership transition, while the board is conducting a formal search to fill the CEO position on a permanent basis, I will be actively and aggressively leading the company on an interim basis, while remaining Chairman. Given my six years of involvement on the board, I have a strong working knowledge of the organization, the strategy, and some new ideas to regain our momentum in North America, while maintaining or even enhancing our momentum internationally.

After our meeting today with our U.S. employees and our meeting with the European and Asian employees tomorrow morning, I will be meeting customers and employees for the better part or August. I'll be taking a day out of my schedule to meet with investors at Canaccord Genuity Conference next Thursday in Boston.

Going forward, while the management team aggressively implements our plans to regain our North American momentum, the board will continue to exercise its fiduciary responsibility in terms of considering credible strategic alternatives. We understand that shareholder patience is worn thin and we need to generate good returns for shareholders quickly.

We believe the best and quickest way to build returns is to execute on our growth and profitability strategies. Doing so will increase the strategic value of our assets and our company. However, we do and always have had the mechanisms in place to fully consider in a timely manner credible strategic alternatives for the company.

Also, as part of our internal board structure, we are announcing today that Hal Covert will be assuming the role as the company's Lead Director. During this time, I intend to continue an open dialogue with the investment community as I mentioned earlier, I will be presenting at the Canaccord Genuity Growth Conference in Boston next Thursday, and meeting there with investors. In the meantime, Jack and I are available to speak with you in the day's ahead.

So to summarize our short-term plans, we will provide our sales force with the tools and invigorate strong North American revenue growth in a competitive marketplace. We will align our cost structure to accomplish revenue growth as well as drive EPS, and we will remain vigilant with our advisors and strategic alternatives.

And with that, I believe, we're ready to take your questions. So operator, could you please open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Bill Plovanic with Canaccord.

Bill Plovanic - Canaccord

So a couple of questions. Just now that you're taking over you've given us kind of a general road map. What specifically do you plan to do over the next, call it, 100 days to get the sales force tools to reengage in North America? What exactly do you point on doing? And the same question for the cost structure. You say that, you're reducing the operating cost in the first half '13, when did that happen and when do we see the benefit of that?

Mark Sieczkarek

Bill, I think if you take a look at the way this company has been built, to your point on sales strategies, we more effectively need to use our bundle to gain multiple capital placements, and obviously, then the ensuing revenue from our annuity stream. I think in many cases we have found ourselves competing head-to-head for A customer for A specific box.

And once again, we have the ability to bundle these boxes and ultimately the tips as well. And obviously, some of our main competitors at this point in time don't have the ability to do. So again, as I said before, without giving away the total playbook, I think that's where we're going to focus our time and effort. And I'd like to think that with the team on board, we can do that in a lot less than 100 days to get this thing rolling again.

So that's the one piece of it, one answer to your question. The second one, relative to costs, I think you had a couple of things that we certainly have taken a look at and taken out, if you will, of the plan. I think in the first half of the year, we certainly had cost relative to the SSP integration. Those will be, obviously, going away. Those are probably the most specific ones that we can point to.

And as you even take a look at our guidance going forward from the beginning of this year to the end of this year, you'll obviously see then the improvement at least in the operating earnings line and obviously the EPS. And to that point, we'll continue that going forward, as we move forward in 2014 as well.

Bill Plovanic - Canaccord

And then if I may ask, just specifically to the line in the press release, and you stated a couple of times, this is my last question is. What is the mechanism you have in place to evaluate credible strategic alternatives with the Board of Directors, specifically what is it?

Mark Sieczkarek

Well, I think as with any public company, when presented with alternatives, we certainly have our bankers on board and we go through those types of reviews on a regular basis. So I don't think any call, if you will, goes unanswered relative to that point. And we're going to continue to monitor that side of our fiduciary responsibility through certainly the best of our ability.

Operator

Our next question comes from the line of Richard Newitter with Leerink Swann.

Richard Newitter - Leerink Swann

Just may be on that last point, not to push it too far. But can you give us any more color around what you're kind of weighing out for return prospects on the investments in the existing business for the restructuring, and how you would more appropriately weigh your strategic alternatives over the next, call it, three-to-six months?

Mark Sieczkarek

I think once again, as we sit here as a board and then look at our business, we certainly have a longer-term strategic financial plan connected to our overall strategy. And what we assess very simply is, how did those strategies play out? And we obviously, discount those as well versus any outside, if you will, strategic alternatives, that's presented to ourselves and act accordingly, and in the best interest of the shareholders going forward.

As I said in my remarks, we certainly feel that if we execute this strategy properly then our asset and ultimately the value of the company is certainly more valuable than anything that has been put forward to us at this point in time. And we're going to continue to look at the business that way. Again, that just falls right in line with I think how other boards look at their fiduciary responsibility as well.

Richard Newitter - Leerink Swann

Just two more quick once. On the comment, you made it about kind of reinvigorating the North American sales force. This is something even on with your predecessor that that I believe bundling was one of the initiatives or efforts that was tried a multiple time to reinvigorate sales growth of capital equipment. What's going to change or what's new or new differentiated about your approach even broadly that gives you confidence you can succeed in this effort at this time around?

Mark Sieczkarek

I think to simply put, we have to really stretch the box, no pun intended, and look outside the box at different venues of doing that. In many cases and even this past quarter, I think we are head-to-head with a competitor with a single box. And in terms of placing it, it came down to just a pricing mechanism.

And I think as we look forward, we have been out there, listen to our customers in terms of their other needs and desires, and figure out different and unique ways of using that bundled approach. So I don't think this is necessarily a case, as you maybe allude to, you tried that before and it didn't work. I think this is a case of we're going to certainly work that different ways and with all desire and intent to make it work.

Richard Newitter - Leerink Swann

And then, just lastly, I think on Liposonix, you said that you've been seeing a significant price compensation or discounting. And just trying to get a feel for who that might be, and obviously it'd be obvious the direct competitor to Liposonix is. But I was under the impression that some of their sales or ASPs were actually stable to improving. Just try and reconcile that comment in light of that data point?

Mark Sieczkarek

Again, in terms of, a number of ways to skin the cat, I think quiet frankly the competition has done a good job, in terms of even masking the two prices of product through some of their marketing programs and their marketing development funds, which end up on a different line of the P&L, and obviously if you take a deep dive into their P&L, they still have certainly a lot of brackets around their numbers as a result of that. So I think we have to get to a true price, if you will to the ultimate customer, in this case, our doctors if you are, kind of, looking at that on apples-to-apples basis.

Richard Newitter - Leerink Swann

And just one follow-up on that. Are in anyway prohibited from lowering the ASP on Liposonix for the terms of the agreement with Restasis?

Mark Sieczkarek

No, absolutely not.

Operator

Our next question is from the line of Chris Lewis with ROTH Capital Partners.

Chris Lewis - ROTH Capital Partners

First off, I was hoping you could just provide some more color around the extent of the pricing pressures that you've seen. When did these start? And I guess, going forward, what have you seen so far this quarter? And then with your new revenue guidance, what's that assumed with the pricing going forward?

Mark Sieczkarek

I think, Jack can talk maybe specific numbers, but certainly North America is where we saw the majority of the pressure, quite frankly two categories specifically, that was, we saw that head-to-head with Thermage. We also saw in with the Liposonix as well. That being said, you can still point to the P&L and the fact that despite those price pressures we had gross margin that on a non-GAAP basis was 60%. So we were able to overcome some of that, just in terms of the way our cost structure is built. But that being the case, we certainly saw a revenue impact. And I think Jack pointed out, even Liposonix where our units were up year-on-year, our revenue was actually down.

John Glenn

Yes, just to give you an idea, Chris, as far as on the gross or on the pricing, you said, it was down about the average sales price, about 25%, so that gives you can idea and then probably for Liposonix somewhere in the $65,000 to $75,000 range.

Chris Lewis - ROTH Capital Partners

And then can you just provide an update on where you are with the progress being made with the sales turnover disruption that was seen in the first quarter and what lingering affects can you talk about that, maybe presented itself in this quarter?

Mark Sieczkarek

Yes, I think, in the start, I think we spoke about the sales turnover specifically in the VASER line and that certainly has been stabilized. And we saw some movement forward as we talked about in our remarks relative to people now cross-selling, if you will, on that VASER line. I think our North American side, we certainly have had turnover in the first part of the year.

It has slowed down significantly, but certainly a concern for us and that's why I said in my remarks that we want to reinvigorate, if you will, the momentum that we had in North America. And with the programs that I feel that we're going to be putting in place, I think we should get our people's fairly excited, that certainly Solta is a great place to be, given the programs that we have as well as, as I said, some of the best products out there in the aesthetics industry.

Chris Lewis - ROTH Capital Partners

And then if I could speak one more in, Mark, maybe just provide some detail under what type of background and experience the board will be looking for in its CEO search and any expected timeline on that front, would be helpful?

Mark Sieczkarek

Well, typically I think from the timeline perspective being through this before, I think we will do a good search. You're looking for a timeframe somewhere probably between three and six months. I think from a background perspective, I think we're going to be looking certainly for an executive who is operationally sound, who has shown the ability through some out of the box thinking to grow categories in the past.

I think in many cases, the aesthetics industry, and I am speaking almost as an outsider looking in, here you form the patterns and everybody falls in for the same pattern. I think some times, somebody who can disrupt that is the best way of getting not only the company, but the industry moving forward as well. So I think those are some of the traits that we'll certainly be looking for.

That being said, I am hitting the ground running in this role. And from my perspective as well, I've taken over two positions in my past history on a temporary basis and two years later I was still there. So don't count me out.

Operator

Our next question comes from the line of Jeremy Feffer with Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald

Couple of my questions were already answered, but I wanted to come back to the strategic review process, so I appreciate the commentary that that you're taking your time and evaluating all options, but I am wondering if you have any sort of internal timelines, either specific or more general because, obviously now that you are restricted from raising more equity, you're expanding your debt, I guess, capacity a little bit and going after, change the restructuring of your sales force and strategy to improve growth, but at what point do you, sort of pull back, and say, maybe our best option is to seek alternatives?

Mark Sieczkarek

Well, in terms of putting a timeframe around it, that they are little bit difficult, but I think in looking at some of these strategies that we're talking about, we'll learn fairly quickly if they are working, if we have traction or not. And at that point, we can certainly take a closer look. Like I said, we have certain financial parameters. We have certain financial returns that we are looking for. And if anything from that nature can be beat by looking at our alternatives we are certainly all yours.

Jeremy Feffer - Cantor Fitzgerald

And then one more, I just wanted to comeback to the pricing issue, again. I assume that's what you were referring to when you referred to becoming more aggressive in your strategy going forward. To what extent do you think that a lot of this is a pricing issue versus just making it a case of clinical superiority?

Mark Sieczkarek

Well, I think it's always a combination of both. In many cases, you can say, you've been outsold, out-marketed. It still becomes a combination of both and the balance of using both ways. In many cases, we have a lot of input from consumers who have had our product and who liked the results from our product. Now be able to use that affectively, more affectively, even with doctors as we're selling through on these boxes. That's something we're going to be looking at.

So it's not just a straight price, but certainly you pay for, kind of, what you get, kind of approach I think to our customers, our doctors. So it's going to be combination of the two. But I think once again, from an aggressiveness standpoint, we have a little bit more on our side relative to the competition, not only because of the razor blade model, but in many cases our competition also cannot bundle the products that we have here at Solta.

Jeremy Feffer - Cantor Fitzgerald

And then just one more quick one from me. Can you remind me, what's the timing of the royalty payment to the Medicis, the Liposonix shareholders?

John Glenn

Yes, that the second payment we'll be making to them will be in October coming up here this year. And then of course next year, the first portion of that payment is due around the Q2 period and then the second portion would be due around that same period, about October of next year.

Operator

Our next question is from the line of Konstantin Tcherepachenets with Raymond James.

Konstantin Tcherepachenets - Raymond James

So again, I just want to comeback to the strategic alternatives, so clearly all companies have fiduciary duties to validate strategic alternatives that come their way. Can you maybe just describe what has changed? Clearly there has been pressure on Solta from sometime to look at strategic alternatives. Can you maybe just describe, what's different now, what are you guys specifically undertaking, just anymore color you guys can provide us would be appreciated.

John Glenn

When you're looking at strategic alternatives, ultimately you can, I guess, put yourself up on the blocks specifically or kind of sit back and wait, and as I said, you need, kind of, credible offer that you can respond to in order to consider a strategic alternative. And I think that's the easiest way for me to answer that question.

Konstantin Tcherepachenets - Raymond James

And, Mark, how do you think about the possibility. If there are no strategic that are willing to make a bid at a credible price. How are you thinking about Solta, even though, Solta is limited as far as cash and share issuance, by finding a creative way to essentially for you guys to do the transformational acquisitions and for you guys to, kind of, get a significant cost synergies?

Mark Sieczkarek

Well, I think I said it early on that, we've kind of entered a new phase and it's really short lived, if you really think about it, via our last acquisition of VASER was at the end of February and here we are now in August. And once we got that on board, our feeling was, now is the time we have to really leverage exactly what you're talking about. And that leveraging the infrastructure, really leveraging our bundle.

I think VASER, as we've talked about before gave us an introduction to the plastics line as well, and that market plays. So that part of it was complete. And when you say about what we're going to do next, now is the time that we especially put our focus on bringing all these things together and doing a much better job of executing on our P&L and driving EPS.

So that's where we're at in our lifecycle. We're very excited about the possibilities that certainly we have in front of us, as a standalone company to drive that home. And just now I said it, probably five times on this call that we'll certainly consider other alternatives, but they have to be there to begin with for us to consider on.

Konstantin Tcherepachenets - Raymond James

So on the point of improving execution and improving profitability, so if everything goes according kind of to your model to plan. I feel that couple of years out, what do you think from your perspective should be the operating margin of this business?

Mark Sieczkarek

Well, I think at this point in time, in not so distant future and that becomes somebody's definition that we can look to the mid-to-upper teens and longer-term I can certainly see us getting into the 20% range as well.

Operator

Our next question comes from the line of Keay Nakae with Ascendiant Capital.

Keay Nakae - Ascendiant Capital

I want to get back to the strategic alternative review as well. At this point, you've had a number of quarters that have disappointed the Street, you've made a management change. And if you haven't had credible offers to date, based on what you thought that this has worked before, it's hard I guess to imagine that these offers that you may get are going to be viewed as credible, now that those potential acquirers maybe viewing the company as vulnerable or weaker than it was. So are we really looking at a model through strategy that's going take a long, long time before eventually you're able to realize what is maybe one of your best assets, which is the recurring revenue. So being rest of on price, getting a larger number of placements, but having to wait a while to really realize that recurring high gross margin revenue.

Mark Sieczkarek

I think you may have answered the question a little bit in terms of the how you posed it. As you mentioned, and yes, we are disappointed, the last couple of quarters have not been up to our specifications and maybe our historical path. Given the point, I think the strategy still has a lot of legs to it.

We've built I think the product platform in a way that it should be very, very customer friendly and also should be extremely friendly to the P&L. We have not executed on that to deploy it, but our intention is, and as you say, a couple of bad quarters can easily be coupled with a couple of really good ones, and that's our intention. And I have no intention of leading this company, which is a great company through a couple of muddle-through quarters.

I think, as I said before, we're not going to wait 100 days for results. Our intention is to work hard in next couple of weeks, get some things, rocking-n-rolling, and getting out there and regaining, if you will, our position in the industry, as certainly one of the forerunners and leaders in this industry.

Operator

Our final question comes from the line of Anthony Vendetti with Maxim Group.

Anthony Vendetti - Maxim Group

Just wanted to follow a little bit up on the cash, and then the cash payment to Liposonix. One, was the payment that I think was due in February has that been made? And then, two, can you talk about the $9.5 million credit to this quarter for the fair value reassessment of the earnouts. Are you expecting to pay out less, and therefore was that the reason for the credit for both Liposonix and Sound Surgical?

John Glenn

First to your first point there, the payment was made. It was approximately $15 million in Q2. For that we have, as I mentioned before, another $5 million came in the studio in October. And we've said that we estimate next year's payment right now, based on our best estimates around $6 million on the Liposonix payment.

As far as the remeasurement of that contingent consideration liability, as you know, we have to go through quiet an extensive process every quarter for accounting purposes to adjust what that total liability is. And we did that this quarter, based on some of the things we've talked about as far as the average sales price coming down as well as the product mix being higher from an international side. Those are playing to where we had to reduce that liability by about $9.5 million, and therefore the credit deferrals grew on the P&L to do that.

Anthony Vendetti - Maxim Group

And then just, Mark, in terms of the sales force and this new strategy there. I just want to talk about the design of the sales force, is it going to be bifurcated? Do you have an ideal number in mind or is there going to be other management changes that you have in mind, whether it's sales force related or adjusting your management positions?

Mark Sieczkarek

I think when it comes to any organization, you're always looking for the right pieces in terms of the management team, in this case we're talking specifically the sales force. I think we'll talk more about some of that in next of few days specifically. We certainly have a lot to handle on this call. And I think I'd like to get back to you on sales force specifically.

But I think from the standpoint of the bifurcation that we currently have in terms of approaching the two separate channels, that's going to remain intact certainly for the time being, as we move forward and have the ability to cross-sell certainly in that plastics segment. But I say that in terms of the short-term, we're going to be looking at everything over the next month or so in terms of more efficient possibilities of getting to our customers.

So everything is up for grabs, if you will, relative to that. And any good ideas, we are certainly going to consider. But I think that's it for the short-term. And like I said to you, I think we'll have some other pieces of the sales force structure that we'll talk about soon enough.

Anthony Vendetti - Maxim Group

And then just the last question, on products. Clearly, the portfolio of products has grown substantially, since Thermage was founded. Is there any product rationalization that you thing needs to be done or are you happy with the current product portfolio and the R&D pipeline that you have in place?

Mark Sieczkarek

I think in terms of the portfolio and the product line we have in place, we're fairly happy. I think you take look at just for instance this year I think the tip, which always gets kind of lost in this discussion, Thermage tip is going gangbusters out there. It gets kind of lost in the bigger discussion as I said. That was a product of our R&D efforts. So that's a good example of some of the newness we're bringing out. We have continued improvements there coming out in the market specifically and once again even with the Thermage next year as well.

So I think we have the basket of the platform that we're going to move forward with and certainly improve upon. Everybody is looking for the next new mousetrap in this industry, not unlike others. And we're going to remain certainly committed to improving that wherever possible through our internal R&D structure.

Operator

That does conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mark Sieczkarek. Please go ahead, sir.

Mark Sieczkarek

So everyone thanks again for joining our call today. We certainly look forward to updating you on our performance coming up in early November. Thanks, again. Bye.

Operator

Ladies and gentlemen, this does conclude the Solta Medical second quarter fiscal 2013 financial results conference call. Thank you very much for your participation. You may now disconnect.

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