Venus Concept Inc (VERO) 2019 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2019 Earnings Conference Call for Venus Concept Inc.

(Operator Instructions) Please note that this conference call is being recorded, and that the recording will be available on the company's website for replay.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website.

We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP.

We generally refer to these as non-GAAP financial measures.

Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our earnings press release issued today on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Dom Serafino, Chief Executive Officer of Venus Concept.

Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Venus Concept's Fourth Quarter 2019 Earnings Conference Call, which also marks our first quarterly earnings call since closing of our merger.

I'm joined today on the call with our Chief Financial Officer, Domenic Della Penna.

Let me first start with a brief agenda of what we will be covering during our prepared remarks.

I will start with a brief description of Venus Concept, then I'll provide a high-level overview of our operating and financial performance during 2019, including a review of our fourth quarter revenue results, which came in at the high end of our previously announced guidance range.

After my opening remarks, Domenic will provide you with a more in-depth review of our quarterly and fiscal year financial results as well as an overview of our preliminary revenue results for the first quarter of 2020, which we provided in our earnings press release earlier this afternoon.

Following Domenic's discussions of our financial results and first quarter outlook, I'll then share some closing thoughts on the expected business and procedure-related disruption as a result of the crisis caused by the global spread of the coronavirus, COVID-19, and then we will open up the call for some questions.

With that overview in mind, let's get started.

As this is Venus Concept's first quarterly earnings call as a new public company following the close of our merger, we thought it would be helpful to spend a few minutes describing the company.

Venus Concept Ltd.

was originally founded in 2018 -- or, sorry, 2010 with -- and over the 9-year period since the company's inception, we have grown the business to more than $107 million of revenue as of the end of 2019.

We closed an important merger transaction on November 7, 2019, where we merged with Restoration Robotics, and the combined entity became Venus Concept Inc.

Venus Concept Inc.

generated GAAP revenue of $110.4 million in 2019.

And on a pro forma basis, the combined entity generated $123.4 million in 2019.

We have developed and commercialized 12 technology platforms, including the ARTAS and NeoGraft systems.

Venus Concept is truly a global company with roughly 50% -- 57% of our total company sales in 2019 coming from customers outside of the U.S. We sell in more than 60 countries, including 29 direct markets and another 36 where we operate through traditional distributor relationships.

We have a significant direct sales and marketing infrastructure with 206 people as of the end of 2019.

We shipped more than 2,400 systems in 2019, and our customers are administering millions of treatments per year with our devices globally.

Our vision is to develop and provide world-class technologies to deliver clinical results in a safe, effective and easy way and to dedicate our company to the best-in-class post-sale support philosophy that can help enhance the profitability and financial success of our customers.

We sell our full suite of medical aesthetic and hair restoration systems to customers in the traditional market, which includes dermatology and plastic surgery, and increasingly, the much larger nontraditional market for aesthetic services such as family practice, general practice, medical spas, which now represent approximately 2/3 of our customer base globally.

The nontraditional market represents a compelling global opportunity for Venus Concept as the traditional industry business models have not sufficiently addressed the needs of these customers.

We have changed the paradigm with a unique pricing and payment option via our industry-first subscription model, which we use in certain product categories in certain geographical markets.

Our subscription model is very similar to a cell phone plan, where you pay for technology over time and can upgrade to the newest technology mid-contract if desired and extending the new contract.

Our subscription model typically are 3-year agreements, and we capture approximately 40% of the contract economics in the first year.

Our customers enjoy seamless and cost-effective upgrade opportunities, and our program is protected by a monthly activation code.

We have a high-touch customer philosophy focused on long-term relationships, supported by our outstanding marketing support, continuous clinical education, practice enhancement programs and much more.

Our key differentiator is that we understand that in order to succeed in the aesthetic market, we need to address the very real challenges doctors face every day, which include: the high cost of technology ownership; technology obsolescence issues that happen typically every 2 years or so in certain aesthetic product categories; the need to provide real marketing solutions to drive patient traction and acquisition in an audience who traditionally have not been good marketers; and of course, ensuring that qualified well-trained staff would be available to our customers.

We believe Venus Concept is well positioned as a leading player in both the global minimally invasive and noninvasive medical aesthetics market and the minimally invasive surgical hair restoration market.

Now turning to our review of our 2019 financials and operating results.

2019 was certainly a year of accomplishments and change for Venus Concept.

We delivered solid commercial execution, developed clear -- developed, cleared and launched new products in both the U.S. and international markets.

We closed a merger transaction with Restoration Robotics on the 7th of November.

We made significant progress enhancing our financial condition with multiple financing transactions.

In terms of our commercial progress in 2019, we reported total GAAP revenue of $110.4 million, up 8% year-over-year, at the high end of our preliminary guidance range.

This growth performance was driven by a 5% increase in the legacy Venus Concept business and the balance coming from revenue from the sale of ARTAS and ARTAS iX systems and product services that were included in our GAAP results following the closing of the merger on the 7th of November.

On a pro forma basis, which shows our sales performance of the combined companies as if the merger had occurred on January 1, 2018, total revenue for the full year of 2019 period was $123.3 million compared to $124.6 million in 2018, a slight decrease of 1% year-over-year.

The change in total revenue year-over-year was driven by 5% growth in the Venus legacy business, offset by a 29% decline in the Restoration Robotics for the sales in the same period.

Total GAAP revenue for the fourth quarter of 2019 increased 11% year-over-year, driven by 2% growth for the Venus legacy business and the contributions from Restoration Robotics following the closure of the merger.

On a pro forma basis, sales declined 6% year-over-year in Q4 2019, driven by a 40% decline in the sales of Restoration Robotics compared to the fourth quarter of 2018.

Our sales results on a pro forma basis were modestly better than we expected and came in at the high end of our previously announced guidance range.

That is to say, we fully expected sales trends for Restoration Robotics to be challenged in the fourth quarter as we work through the initial stages of our integration and began implementing our commercial strategy for the combined hair restoration business going forward.

We were pleased with our sales and operating performance in the fourth quarter relative to our plan and believe we ended 2019 on a positive note.

Overall, our sales performance in 2019 reflects strong execution of certain strategic objectives and candidly, some unanticipated headwinds that resulted in the total growth was less than we targeted coming into the year.

On the positive side, our new product introductions were one of the largest drivers of growth in 2019, which helped us offset some of the unanticipated business-related disruption we highlighted in the third quarter earning results, driven by proacted -- protracted, excuse me, period between the announcement and closing of our merger with Restoration Robotics.

Our continued focus on product innovation, led by a strong year of development, regulatory clearance and launches of new products in 2019.

We launched 2 new products in the U.S., the Venus Heal and the Venus Bliss, the latter of which we announced via a press release in August.

The Venus Bliss is our solution to fat reduction for the abdominal area and the flanks.

The Bliss is very comfortable for patients, provides excellent results and has little to no downtime.

We believe that the Bliss will be a preferred solution for providers as there is no disposable cost per treatment, which makes the profitability per procedure extremely compelling for physicians.

The early feedback from our initial launch during Q4 of 2019 was very positive, and we're excited by the prospects of this new product introduction as the fat reduction category is one of the fastest-growing, nonsurgical, noninjectable procedure categories in the medical aesthetic industry today.

Outside of the U.S., we launched a total of 4 new platforms in 2019: Venus Heal, Venus Bliss, Venus Epileve for permanent hair reduction and the NeoGraft 2.0 system for hair restoration.

With respect to our merger with Restoration Robotics.

As we discussed over the second half of 2019, the merger took significantly longer to close than we anticipated, and we experienced disruption in both businesses as a result.

We are pleased to announce that as of the closing on November 7, we are quickly moving towards the execution of our integration of the 2 companies.

The integration is progressing well, and we've identified $18 million of synergies and cost savings that we expect to realize during fiscal year 2020.

We developed a new commercial strategy for ARTAS and ARTAS iX systems, products and services, which had struggled to drive broad-based adoption and utilization in recent years.

There are 3 key tenets to this new commercial strategy.

First, an improved pricing model, where we lowered the list price of the ARTAS from -- to $229,000 compared to $325,000 previously, still improving the gross profit margin profile as a result of significant reduction in the cost of goods that we identified; second, a targeted plan to engage with clinicians to reinvigorate underutilized ARTAS systems, including practice enhancement managers and customer-focused hair technicians like our VERO grafters team; and importantly, the third and key tenet to the new commercial strategy, which we believe will improve the growth trends for ARTAS, is the fact that we are now able to offer the most comprehensive hair restoration solutions offering available today.

This point can't really be overstated.

With ARTAS and NeoGraft, we now have an end-to-end portfolio of minimally invasive solutions unique from any competitor in the $4.1 billion global hair restoration market.

While the new commercial strategy represents a compelling near-term driver for improving performance of Venus Concept, the R&D opportunity we see from this combined R&D teams, we believe, represents a significant potential driver of growth over the long term.

Our longer-term R&D strategy is focused on leveraging the potentially powerful combination of Venus expertise in noninvasive energy-based technologies for aesthetic applications and Restoration Robotics' expertise in robotic technology, 3D preoperative planning and software.

Specifically, we believe that there is a compelling opportunity to introduce new, minimally invasive robotic solutions for medical aesthetic procedures that are only treated with invasive surgical interventions today.

We will have much more to share regarding long-term opportunity from the combined R&D teams as we progress through 2020.

For now, we just know that the integration plan for the R&D team is progressing and going well, and we continue to be excited about the long-term prospects for our technology.

At this point, I'd like to turn the call over to Domenic Della Penna, who will provide a detailed review of our fourth quarter and fiscal year 2019 financial results and discuss the balance sheet and financial conditions.

Domenic?

Thanks, Dom.

My prepared remarks this afternoon will focus on the company's reported results on a GAAP basis, unless otherwise noted.

To avoid confusion when evaluating our reported results or when reviewing our historic financial results and SEC filings, let me highlight a few items regarding our merger transaction with Restoration Robotics.

First, reported results prior to the fourth quarter of fiscal year 2019 reflect the business operations and performance of the legacy Venus Concept business, referred to as Venus Concept Ltd.

in our SEC filings.

Second, starting with the fourth quarter and fiscal year 2019 periods, our reported results include the contributions from Restoration Robotics from November 7, 2019, to December 31, 2019.

This makes the evaluation of financial results compared to 2018 a bit challenging, given it's not an apples-to-apples comparison.

Where possible and only in certain areas, we will call out areas where results were materially impacted by this nuance to help the investment community understand the respective contributions from each business in the period.

Fourth quarter total GAAP revenue increased $3.2 million or 11% year-over-year to $31.9 million.

As reported on our GAAP income statement, total products and services revenue increased $5.5 million or 55% year-over-year to $15.5 million, and total lease revenue decreased $2.3 million or 12% year-over-year to $16.4 million.

Total products and services revenue in the fourth quarter of 2019 included $2.8 million from the sale of ARTAS and ARTAS iX systems, products and services following the closing of our merger on November 7, 2019.

Excluding revenue from Restoration Robotics post closing, products and services increased 27% year-over-year in Q4.

The decrease in lease revenue in Q4 2019 was driven primarily by our strategy of shifting the mix from subscription to cash sales in the period.

Turning to a brief review of our revenue performance by geography and product line, which incidentally is how we report and discuss revenue results in our 10-K and 10-Q filings.

Fourth quarter total GAAP revenue by geography was driven by a $3.5 million increase or a 29% year-over-year in international sales and which offset a $300,000 decrease or 2% year-over-year in U.S. sales compared to the prior year period.

The increase in sales to international customers benefited from strong sales in Europe as a result of certain strategic changes we made in the region in the fourth quarter of 2018.

Fourth quarter total GAAP revenue by product category was driven by: an increase of $3.1 million or 42% year-over-year in system sales, which are cash sales or sales of systems with payments expected in less than 12 months; an increase of $1.7 million or 129% year-over-year in service revenue, including VERO grafter technician services, ad agency services and extended warranty sales; and an increase of approximately $700,000 or 57% year-over-year in sales of products, including skin care, hair and other consumables.

The growth in these 3 product categories was partially offset by a decrease of $2.3 million or 12% year-over-year in leases revenue, which is where our subscription program is reported and represents all sales with typical lease terms of 20 -- of 36 months.

Turning to a review of our fourth quarter performance across the rest of the P&L.

Total GAAP gross profit decreased $2.3 million or 10% year-over-year to $19.7 million, representing a gross margin of 62% compared to a gross margin of 77% in Q4 2018.

The primary driver year-over-year change in gross margin was revenue mix, including the mix of revenue by geography and by product category compared to the prior year.

GAAP gross profit in the fourth quarter of 2019 includes the impact of Restoration Robotics post close, including purchase accounting impacts, which represented approximately 160 basis points to the year-over-year change in gross margin.

Total GAAP operating expense increased $6.4 million or 21% year-over-year to $37.6 million.

The increase in total operating expenses was driven primarily by an increase of $7 million or 79% year-over-year in general and administrative expenses, an increase of $1.4 million or 13% year-over-year in selling and marketing expenses, offset partially by a decrease of $2.1 million or 23% year-over-year in provision for bad debt expense.

The change in total GAAP operating expense in Q4 was driven by a 3% increase in OpEx from the legacy Venus business and the contributions from Restoration Robotics post close.

Total GAAP operating expenses, specifically general and administrative expenses for the fourth quarter of 2019, include approximately $5 million of costs related to the merger, which did not impact results in the prior year period.

Excluding the costs related to the merger in the period, the total general and administrative expenses increased approximately $2 million or 23% to $10.8 million compared to $8.8 million for the fourth quarter of 2018.

Total GAAP operating loss in the fourth quarter of 2019 was $17.9 million compared to an operating loss of $9.2 million in the prior year period.

Excluding the impacts of Restoration Robotics post close and the $5 million of merger costs, our fourth quarter operating loss was roughly flat year-over-year.

Net loss attributable to Venus Concept Inc.

for the fourth quarter of 2019 was $20.8 million or $1.07 per share compared to $13.2 million or $2.70 -- $2.77 per share for the fourth quarter of 2018.

Weighted average shares used to compute net loss attributable to Venus Concept Inc.

holders per share were 19.5 million and 4.8 million for the fourth quarters of 2019 and 2018, respectively.

Adjusted EBITDA loss for the fourth quarter of 2019 was $11.5 million compared to adjusted EBITDA income of $2.4 million for the fourth quarter of 2018.

We have provided a full reconciliation of our GAAP net loss to adjusted EBITDA in our press release this afternoon.

Turning to a brief review of our fiscal year 2019 results.

Total GAAP revenue increased $7.8 million or 8% year-over-year to $110.4 million.

The increase in total revenue by geography was driven by an increase of $6.4 million or 11% in international sales and an increase of $1.4 million or 3% in U.S. sales.

Total products and services revenue for the fiscal year 2019 increased $14.2 million or 46% to $45.4 million compared to $31.1 million for the fiscal year 2018.

Total leases revenue for the fiscal year 2019 declined $6.4 million or 9% to $65.2 million compared to $71.5 million for the fiscal year 2018.

Total GAAP revenue for the fiscal year 2019 included revenue of $2.8 million from Venus Concept Inc., formerly Restoration Robotics, Inc., from November 7, 2019, to December 31, 2019.

Net loss attributable to Venus Concept Inc.

holders for the fiscal year 2019 was $40.6 million or $4.77 per share compared to $15 million or $3.16 per share for the fiscal year 2018.

Recall, the 2018 results were for legacy Venus Concept only.

The largest driver of the year-over-year change in net loss was the increase in GAAP operating expenses of approximately $24 million, specifically, an increase of $20.1 million year-over-year in general and administrative expenses.

Adjusted EBITDA loss for the fiscal year 2019 was $12.5 million compared to adjusted EBITDA income of $9.8 million for the fiscal year 2018.

As detailed in the reconciliation table in our press release this afternoon, we had approximately $13.6 million of nonrecurring expenses in 2019, the majority of which were additional professional fees for our merger and thus, are not expected to be part of our go-forward operating expense profile.

The company had $15.7 million and $6.8 million of cash and cash equivalents as of December 31, 2019, and December 31, 2018, respectively, and total debt obligations of approximately $69 million and $56.5 million as of December 31, 2019, and December 31, 2018, respectively.

The year-over-year change in cash was driven by an increase of $42.2 million in cash from investing activities and an increase of $6.4 million in cash from investing activities -- sorry, an increase of $42.2 million in cash from financing activities and an increase of $6.4 million in cash from investing activities, partially offset by a use of cash from operating activities of $39.6 million.

The year-over-year change in cash from financing activities consisted primarily of: net proceeds from the drawdown of the Madryn Credit Agreement of $9.7 million; net proceeds from issuance of unsecured senior subordinated convertible promissory notes of $29.1 million; net proceeds from the equity financing we completed concurrently with the merger closing of $26.5 million; proceeds from the exercise of options of $0.4 million; and proceeds from the drawdown on the CNB credit facility of $2.1 million, partially offset by the repayment of the solar loan and security agreement of $20 million; the issuance of the loan to Restoration Robotics of $4.5 million prior to the merger; and to a lesser extent, payment of the NeoGraft earnout liability of $0.8 million.

On March 18, 2020, we raised $22.3 million through a sale of shares of common stock, Series A convertible preferred stock, and warrants to purchase common stock in a private placement to a group of investors, including EW Healthcare Partners, HealthQuest Capital and SEDCO Capital.

The transaction was completed on March 19, 2020.

Turning to a review of our guidance, which we updated in our press release this afternoon.

Due to the rapidly evolving environment and continued uncertainties from the impact of COVID-19, the company is withdrawing its previously announced fiscal year 2020 revenue guidance, which was issued on January 13, 2020.

At this date, the company cannot predict the specific extent or duration of the impact of the COVID-19 outbreak on its financial and operating results for the fiscal year 2020.

The company plans to provide additional information to the extent practicable during its first quarter of 2020 earnings call in May.

We have also provided preliminary revenue expectations for the first quarter of 2020 in this afternoon's press release, which reflect the significant impact of the COVID-19 outbreak on our global business.

Specifically, we expect preliminary total GAAP revenue for the first quarter of 2020 to be in the range of $14 million to $18 million compared to total GAAP revenue of $24.6 million for the first quarter of 2019, representing a decrease of 27% to 43% year-over-year.

Additionally, in terms of operating expenses and cash burn, while we are not in a position to offer specific financial guidance at this time, we would like to offer the following considerations for modeling purposes.

The combined companies had total OpEx of $29.5 million in Q1 2019, roughly 1/3 of which came from Restoration Robotics.

Coming into 2020, we had identified $18 million of synergies and expense savings and had started the process of implementing these cost cuts as part of our integration plan.

That said, the $18 million was our target for the full year 2020 period, and only a portion of the $18 million were expected to be realized in Q1.

Our first quarter burn will also be impacted by additional professional fees and costs related to the PIPE financing transaction and year-end close.

Further, as with other medical device companies, we see OpEx represent a higher percentage of sales in the first quarter each year than we do in the other 3 fiscal quarters as we have incremental spending for our trade shows and insurance premiums, among others, would skew Q1 a bit higher on a relative basis.

Finally, I would like to remind everyone that we have provided preliminary revenue expectations for the first quarter in the interest of full transparency during this unprecedented time of uncertainty and crisis in our global addressable markets.

We intend to give additional color on top line and expense lines going forward as part of our Q1 call in May, and we are unable to give incremental details in these areas at this time.

So with that, I'll turn the call back to Dom.

Thanks, Domenic.

Before we open up the call for your questions, I wanted to share a few thoughts with you on the dramatic change in our business during the first quarter.

The global pandemic caused by the novel coronavirus has significantly impacted our growth trends during the first 3 months of 2020, which, while difficult to predict, we expect will continue to impact our results in the second quarter of 2020 and possibly beyond.

We are, however, a global business, having established commercial presence, as I said earlier, in 60 countries -- or over 60 countries and, of course, over -- in the course of our 10-year history, approximately 30% of our 2019 sales came from the APAC and European regions, which were impacted by the pandemic beginning in January in China and the broader APAC region, and then as disease spread, our business in Europe saw disruption beginning in February and worsened in March.

We had experienced a pronounced decline in both procedure and system adoption in these global markets during Q1.

In terms of our U.S. business, we got off to a very strong start to the quarter, which was fueled by our recent new product introductions, specifically the strong market response to our Bliss commercialization, which was stronger than expected and had us preparing for a backlog situation as a result of the impressive demand.

Beginning in March, however, along with most medical device companies with businesses that rely on elective procedures, the trends in both procedures and system adoption deteriorated meaningfully.

We, like everyone else, are dealing with unprecedented disruption in our addressable markets as a result of this pandemic both in terms of the magnitude, the pace and the pace of declines.

We are focused on supporting our global customers in whatever way and extent possible while protecting the health and safety of our employees.

As a result of this rapidly changing market dynamic in each of our primary markets around the world and the high level of uncertainty with respect to the duration of this period of disruption and the pace of the recoveries in APAC, Europe and the U.S. this year, we, as we said earlier, have withdrawn our 2020 revenue guidance range that we had announced in January.

We intend, however, to provide you an updated thoughts as part of our Q1 earnings call in May.

In the interim, while we are unable to answer questions about our 2020 growth profile with specificity, we are now -- we are not standing still.

In fact, in response to this challenging sales trend in recent months related to COVID-19, we conducted a full review of our 2020 operating budget.

In this review, we identified additional operating expense reduction opportunities of at least $20 million.

We will begin implementing this new expense reduction program as of the start of the second quarter of 2020.

We plan to provide additional detail on the composition and cadence of these incremental cost savings as part of our Q1 call as well.

We also continue to identify additional expense cuts that will be made if we experience a prolonged recovery from this pandemic.

We will get through this challenging time, and we are focused on maximizing our available capital resources and on ensuring that we are best positioned to return to above-market growth and significant market share gains as soon as possible.

Lastly, I do want to thank all of our employees and customers for their resilience and flexibility during this challenging time and, of course, our shareholders for their continued support of Venus Concept.

With that, operator, I'd like to open it up to call -- questions to callers.

Operator?

(Operator Instructions) And our first question comes from Suraj Kalia with Oppenheimer & Co.

Gentlemen, can you hear me all right?

We can, Suraj.

I hope you guys are safe and healthy.

Crazy times.

So Dom and Domenic, bunch of questions.

Let me see if I can just kind of parse through them quickly.

China, obviously, your comments are well noted about impact from COVID-19 in January.

But the U.S. was strong in Jan and Feb.

So the numbers for Q1 would indicate that March had seen a precipitous drop.

I guess, where I'm headed is, if I extrapolate that trend to Q2, not that you'll have provided guidance, it almost gives us a sense that Q1 might be a relatively high watermark.

Am I too far off in my thought process just given the uncertainty here?

Yes, Suraj, I think that as we look at our business, 2 things.

I mean Q1 is typically the slowest in our aesthetic business.

And when we looked at January, you're absolutely right.

We did have a very strong start in the U.S., although the majority of the business in our space typically comes in the last 3 weeks or so of the final month of the quarter.

But as we saw the spread from China into other markets, we recognize that it did create somewhat of a challenge to get even component parts out of China as they shut down to be able to build our platforms in a timely manner to take advantage of, I'll call, the delay in the reaction in North America.

Unfortunately, we found ourselves right in the middle of March facing the realities of the U.S. shutdown.

And as I said earlier, the U.S. does represent about 46% of our global business.

So having said that, if there is any good news into Q2, typically, the trend does continue in terms of the first month of each new quarter is relatively quiet in our space.

So none of us know when this will end.

But if there is any consolation here, at least for the month of April, we have a little bit of room in terms of how we deal with things.

Does that help you?

Yes.

Fair enough.

And just between products and lease revenues, would I be too far off for FY '20 in terms of -- in the current environment, one would think that a subscription model would pick up, right?

Because of the capital outlay, that burden has been removed in the current environment.

Any qualitative assessment you can provide us of how you guys are thinking -- even though the guidance is removed, how should we think of -- because earlier, it was like you all wanted to be at the 50%, 60% range for subscription.

Should we think it should pick up a little more deliberately as the year progresses?

Any color would be great.

Yes.

No, Suraj, it's a great question.

And I think that, that is one of the things that I believe separates Venus Concept from all of our competitors.

Anecdotally, we heard a lot of examples of end-of-quarter challenges with leasing companies financing various deals from a variety of different companies.

And so this -- having the ability to use our subscription model to sort of hedge against that will definitely help us if this thing gets extended beyond any reasonable amount of time.

We think that, ultimately, what the subscription model will allow us to do is to pay close attention to where the opportunities are, because ironically enough, the demand was still there.

And this is not a 2008 sort of financial crisis situation.

This is obviously a health situation.

So I think that as we come out of this, the beautiful thing about what we have available to us is the ability to sort of adjust where we would go with our subscription model, and we feel that the subscription model will give us a competitive advantage, especially as we come out of sort of this, I'll call it, distraction, for lack of a better word, that's had everybody shut down their doors for a long period of time.

Got it.

And final question for Domenic, at least 2-part question.

So Domenic, the $18 million in synergies, how should we think about what is comprised within the gross margin line item?

And partly, the reason I ask is the gross margin in Q4, the composite gross margin is roughly around 62%.

We were expecting it to be closer to 69%.

If you can give us some idea as to how you are thinking and what the different components of gross margin are going to move.

And the subpart to my question is, for the recent financing, can you give us, on an as-converted basis, how much are the holdings for insiders?

Thanks, Suraj.

So in terms of the gross margins, so first off, the $18 million in synergies relate to operating expense synergies and not necessarily gross margin-related.

Those are strictly on the OpEx side.

In terms of the reduction in gross margin, part of it is a function of some purchase accounting resulting out of the Restoration Robotics merger, which impacted us to the tune of about 160 basis points.

In addition, the decision to rebalance cash versus subscription also led to a slight deterioration in ASPs in the fourth quarter as we try to consciously rebalance the split from -- on a Venus standalone, from approximately 70% subscription to closer to 60% to 65%.

So that accounts for part of the deterioration in margin.

In addition, the success of our 2 to 5 services ended up driving the services line revenue, but it impacted our margins to some extent.

We have since revisited the nature of the services provided to try to change the mix within that going forward, such as -- such that it's not impacting us as much.

So we should start to see a difference in the go-forward margin profile of the 2 to 5 services that we offer.

In addition, the -- there was a large chain order in China, which impacted our margins overall.

So we had lower proportion of subscription deals which impacted ASPs.

Our U.S. business, as I noted in my comments, was down.

We had a good result with international and, in particular, in Europe.

But the U.S. business also suffered from integration efforts that were protracted because of the delay in the merger.

So we had various vacancies that we were -- territories that were left relatively unattended as we try to close this deal and leverage the combined sales force.

So that, unfortunately, impacted our U.S. results where we also have higher margins.

So a combination of territory and product mix affected our margins in Q4.

And there was an element of, I would call it, cleanup in Q4 in terms of the combined company and revisiting inventory reserves, bad debt provisions, purchase price accounting and making sure that we basically have everything cleaned up as part of our go-forward balance sheet as a fully integrated company.

Now the second part of your question, I'll have to get back to you, Suraj, on that because I don't have those details in front of me in terms of the cap structure on a go-forward basis.

So we'll follow up on that with you.

(Operator Instructions) Our next question comes from Anthony Vendetti with Maxim Group.

Sure.

So on Venus Bliss, it sounds like you got off to a strong start in the beginning of the year.

And like you said Dom, March, particularly the last couple of weeks of March is when you get most of your sales.

Can you give a little more color on what trajectory you were on prior to, let's say, March 1?

What was Venus Bliss looking like?

Was it ahead of your schedule?

Just a little more color on that.

And then I just had a follow-up question on expense reduction.

Sure.

I mean, I think that, obviously, we can't give product-level disclosures at this point.

What I will say is as you'll recall, we did launch the Venus Bliss in Q4 in a soft launch mode, and we continued to be in soft launch in Q1, because already, before the coronavirus hit, we had a long lead time item per component parts coming from China that was also sort of challenging our sell-through.

Having said that, the Bliss is becoming a product that will be probably our leading category overall.

And I think that what we will do is take a look at supply chain, now that China has opened its supply chain, for the most part, for the component parts that we need for the Bliss, and we do anticipate that it will be the largest growth driver for us in 2019.

Obviously, getting into the back end of the first quarter and having the markets essentially shut down, I mean, our salespeople were getting very creative in doing sort of in-house -- or doing teleconferencing demos, et cetera, et cetera, as were some of the customers that were still open using the Bliss.

We think that there's a fair assumption here that this product will ultimately become our primary focus point for the balance of this year.

Okay.

And then on the expense reduction side.

So Domenic spoke about the $18 million in operating cost synergies.

But Dom, you mentioned, based on the current situation, there's about $20 million in expense reductions.

Is that in addition to what you're looking at in terms of cost synergies?

Or is that $20 million just an incremental addition of $2 million from the (inaudible)?

No.

So $18 million was identified as part of the transaction with the Restoration thing that we closed in November 7, the deal.

This is above and beyond that given the current circumstances.

So we feel pretty confident that the 2 of them combined will be integrated into our 2020 OpEx.

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