Apyx Medical - Earnings Call - Q3 2019
November 11, 2019
Transcript
Speaker 0
Good afternoon, ladies and gentlemen, and welcome to the Third Quarter of Fiscal Year twenty nineteen Earnings Conference Call for Apex Medical Corporation. At this time, all participants are in place in a listen only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. 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 Form 10 k filed with the Securities and Exchange Commission, as well as our most recent 10 Q filing.
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 these non GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.
I would now like to turn the call over to Mr. Charlie Goodwin, Apex Medical's President and Chief Executive Officer. Please go ahead, sir.
Speaker 1
Thanks, operator. Welcome, everyone, to our 2019 earnings call. I am joined on this afternoon's call by our Chief Financial Officer, Tara Sem. Let me provide you with a quick agenda for today's call. I'll begin my prepared remarks with an overview of our third quarter revenue performance and the primary drivers of our revenue growth during the period.
Then I'll discuss our recent operational progress with updates on the four strategic initiatives that we are pursuing as part of our longer term growth strategy as well as the enhancements we have made to our product portfolio. Kara will then provide you with a detailed revenue of our financial results for the third quarter as well as our fiscal year guidance for 2018, which we updated in our earnings press release this afternoon. I'll then share some additional closing remarks before we open the call for questions. During the 2019, we generated impressive revenue growth continuing the strong financial performance that we saw during the 2019. We reported total revenue in the third quarter of 7,600,000.0, which represented growth of 3,900,000.0 or a 106% growth year over year.
Our total revenue growth continued to be driven by strong global demand for our advanced energy products. We achieved impressive sales performance in our advanced energy business during the third quarter with growth of 3,000,000 or a 104% year over year. We continue to drive growth in our advanced energy business by increasing the adoption and utilization of our Renuvion generators and handpieces in The US cosmetic surgery market and fulfilling demand from distributors in The O S OUS market. We also saw contributions from growth in our OEM business, which increased by $800,000 or a 116% year over year. Our OEM growth was primarily driven by contributions from our electrosurgical generator and supply agreement with Symmetry Surgical.
Looking at our third quarter twenty nineteen revenue performance from a geographical standpoint, our total US sales increased by 2,800,000.0 or a 101% year over year. US sales were primarily driven by a 96% increase in our advanced energy sales and a 116% increase in OEM sales. Our advanced energy sales performance in The US resulted from strong growth in sales of our Renuvion generators coupled with utilization based demand for our handpieces. Our total international sales increased 1,100,000.0 or a 123% year over year. Our international sales growth was driven by strong utilization related demand for our Renuvion generators and handpieces from distributors in our existing O US markets, most notably in Europe and Latin America.
As a reminder, we added four new countries during the first six months of this year. While our team remains focused on expanding our geographical footprint, we continue to expect our growth in 2019 to be fueled by the distributor relationships that we have formed in prior years. With our impressive third quarter sales performance as a backdrop, I'll now turn to a discussion of our recent operational progress beginning with a review of our four strategic initiatives that we're focused on. Number one, formalize our regulatory strategy to pursue specific clinical indications that will enable us to market and sell Renuvion for our targeted procedures. Two, secure new clinical evidence demonstrating the safety and efficacy of our Renuvion technology.
Three, enhance physician and practice support for our cosmetic surgery customers. And four, improve our manufacturing capabilities and efficiencies. We believe our focus on these four strategic initiatives will position Apyx Medical for long term growth in the cosmetic surgery market, and we continue to make important progress with respect to each of them. Beginning with our first initiative, our clinical and regulatory affairs teams remain focused on securing the necessary support to obtain new clinical indications from the FDA for our target procedures within The US cosmetic surgery market. Specifically, we have been focused on developing a new clinical study to evaluate the safety and efficacy of Renuvion in dermal resurfacing procedures.
We intend to use the results of this study to support a new application for FDA five ten clearance for Renuvion with an indication for dermal resurfacing procedures. During the third quarter, we developed our investigational device exemption or IDE application for this study and submitted it for approval. We subsequently obtained and incorporated feedback from the FDA on our proposed clinical study protocol. And lastly, we selected and trained the clinical sites that will participate in the study. In addition to dermal resurfacing, we're also focused on building the requisite clinical support to pursue a new indication for the treatment of skin laxity via the subdermal use of Renuvion in the neck and submental regions.
We obtained our IDE approval for a study evaluating the use of Renuvion for treatment of skin laxity on July 25, And we are excited to report the initiation of enrollment in October. This is a prospective multicenter, multi phase evaluator blinded study designed to evaluate the safety and efficacy data on 52 subjects at up to five investigational centers in The US. Our primary effectiveness endpoint is the improvement in the appearance of lax tissue in the neck and submental region at six months as determined by an assessment of before and after photos by three blinded independent photographic reviewers. The design of this study assumes a seventy five percent success rate of subjects with correctly identified images, meaning that more than seventy five percent of the subjects must have their six month images correctly identified by two of the three blinded independent photographic reviewers. The study's primary and secondary safety variables will be the evaluation of post treatment pain and discomfort and the evaluation of adverse events respectively.
It is important to note that we will conduct our skin laxity study in two phases. The first phase will include 20 subjects, and we intend to report the one month safety data from this phase to the FDA for review. Following the FDA's review and approval of the safety data, we will expect to begin the second phase of the study, which will include an additional 32 subjects. As a reminder, during the third quarter, we added important expertise to our regulatory affairs team to support and inform our long term strategy. We appointed doctor Labette Garber as our director of global regulatory affairs in July and also announced the appointment of Minnie Baylor Henry to our board of directors who chairs our newly formed regulatory and compliance committee.
Turning to our second strategic objective, we continue to develop additional clinical studies and publications to expand our portfolio of clinical evidence demonstrating the safety and efficacy of our Renuvion technology in cosmetic surgery procedures. As I have mentioned on prior calls, in 2019 we expect to publish a retrospective clinical study examining the subdermal use of Renuvion in liposuction procedures. This study is awaiting publication in the Journal of Plastic and Reconstructive Surgery, and we look forward to providing an overview of this study and its findings becomes available. We also made important additions to our clinical team during the third quarter with the appointment of Carrie Larson as our senior director of clinical affairs and the additions of four new plastic and cosmetic surgery experts to our medical advisory board, namely Doctor. Brian Kinney, Doctor.
Paul Ruff, Doctor. Richard Gentile, and Doctor. Edward Zimmerman. With respect to our third strategic objective, during q three, we entered into a partnership with a private company called MedShift, which offers its surgeon customers access to medical equipment as part of a monthly subscription program and provides them with a variety of practice focused support services, including web development, marketing, and procedural analytics. This partnership enables us to deliver another attractive option for those surgeons that are interested in adopting Renuvion technology without making an initial capital investment and also offer additional support solutions for their practice.
The partnership with MedShift gives our sales force another option to offer prospective customers who are interested in purchasing alternatives. In addition to our MedShift partnership, we continue to develop and implement new programming to provide support and training for our current and prospective surgeon customers. On our recent calls, I have introduced our new physician mentor programs or PMPs, which involve educational sessions and live cases designed to provide surgeons with the ability to learn directly from their peers in a formal educational setting. During the quarter, we continued to organize new PMPs and have hosted a total of 15 of these events in key locations across the country since the beginning of 2019. We also continue to utilize our team of clinical specialists to provide our new customers with additional one on one training as they begin their first cases.
Lastly, with respect to our fourth strategic initiative, we continue to implement new process improvements to enhance our manufacturing efficiency and reduce the per unit manufacturing cost for our advanced energy products. I am pleased to report that our team has made important progress over the course of twenty nineteen, and we are now beginning to see the early benefits of our advanced energy gross margins as a result of our focus in this strategic initiative. I'd like to close my update on our operational progress this quarter by highlighting the important achievements made by our R and D and regulatory affairs teams which culminated in the development and regulatory clearance of two new handpieces. On August 5, we announced the receipt of FDA five ten clearance for the next generation version of our J Plasma precise handpiece with an indication for cutting, coagulation, and ablation of soft tissue. The J Plasma precise handpiece was designed for use in laparoscopic procedures and is used by our surgeon customers in our OUS markets.
In recent years, we received feedback from many of these customers that they would like to see an updated version of this handpiece, which would enable them to deliver standard monopolar coagulation energy in addition to our precise J plasma energy to coagulate wide areas of tissue during a procedure. In response to this feedback, our r and d and manufacturing teams created this next generation version of our J Plasma precise handpiece, which incorporates our cool coag technology, enabling surgeons to alternate between delivering our novel J Plasma energy along with monopolar coagulation energy and a non contact spray called plasma beam coagulation in a single handpiece. They also redesigned the new handpiece to make it 39% lighter than the prior generation to provide our surgeon customers with improved ergonomics. We expect to begin our limited commercial launch of this new handpiece in select countries in Continental Europe by the 2019. On October 14, we announced five ten ks clearance of the APYX plasma RF handpiece, The latest addition to our Renuvion product portfolio for the percutaneous delivery of radio frequency energy and or helium plasma cutting coagulation and ablation of soft tissue.
The APYX plasma RF handpiece is designed to be used percutaneously and features important enhancements compared to prior generations of our Renuvion handpieces. Most notably, the APEX plasma RF handpiece has a smaller diameter instrument shaft, a bullet shaped instrument tip, a new handle design, and distance indicators to help surgeons minimize unwanted energy application near the incision entry site. It will be made available in multiple configurations to meet the needs of our cosmetic surgery customers. I'm especially pleased with the product development process that led to the creation of the APYX PlasmaRF handpiece. During this process, we obtained extensive feedback and input from our surgeon customers and members of our medical advisory board.
I believe our team has developed a great product, and we look forward to getting in the hands of our surgeon customers as we initiate a limited commercial launch during the 2019. Importantly, our APEX plasma RF handpiece will be used in our clinical study evaluating the use of Renuvion in skin laxity procedures. In short, during the third quarter we achieved impressive financial performance combined with important operational progress that will position APICS Medical for continued success as we strive to be the world's leading innovator and unique energy solutions for the cosmetic surgery market. I'll now turn the call over to Tara to provide you with a detailed review of our third quarter financial results and discuss our fiscal year twenty nineteen financial guidance, which we updated in this afternoon's release. Tara?
Speaker 2
Thanks, Charlie. As a reminder, our results are reported on a continuing operations basis for the period ending September 3039. Any financial impacts related to the divestment and sale of our core segment appear in our financial statements as discontinued operations and are excluded from the commentary that follows. Total revenue for third quarter twenty nineteen increased $3,900,000 or 106% year over year to $7,600,000 compared to $3,700,000 last year. By business segment, total revenue growth in the third quarter was driven primarily by Advanced Energy segment sales, which increased $3,100,000 or 104% year over year to 6,100,000.0 benefited from growth in sales from our OEM segment.
OEM segment sales increased $800,000 or 116% year over year to $1,500,000 in the 2019, driven primarily by sales of generators related to our manufacturing and supply agreement with Symmetry Surgical. Advanced Energy and OEM sales represented approximately 8020% of total revenue in the 2019 respectively, compared to 8119% in the prior year period. Revenue in The United States increased approximately $2,800,000 or 101% year over year to 5,600,000.0 and international revenue increased approximately $1,100,000 or 123% year over year to $2,000,000 International revenue represented approximately 27% of total sales in the 2019 compared to 25% of total sales in the 2018. Moving down the P and L, gross profit increased approximately $2,500,000 or 99% year over year to $5,000,000 compared to $2,500,000 for the 2018. The increase in third quarter twenty nineteen gross profit was driven primarily by strong sales in the company's Advanced Energy segment.
Gross margins for the 2019 was 66.2 percent compared to 68.7% last year. The primary drivers of the decline in gross margin this quarter included reallocations of overhead expenses in Bulgaria for manufactured inventory, OEM revenue related to our agreements with Symmetry Surgical and revenue mix by geography in our Advanced Energy segment. Operating expenses for the third quarter increased $4,400,000 or 82.7% year over year to $9,700,000 compared to $5,300,000 for the 2018. The year over year change in operating expenses was primarily driven by a $1,800,000 increase in selling, general and administrative expenses, a $1,400,000 increase in professional services and a $900,000 increase in salaries and related costs. Loss from operations for the 2019 was $4,700,000 compared to operating loss of $2,800,000 last year.
Net loss from continuing operations for third quarter twenty nineteen was $4,300,000 or $0.13 per diluted share compared to a net loss from continuing operations of $438,000 or $01 per diluted share for the 2018. Third quarter twenty nineteen adjusted EBITDA loss was $3,700,000 compared to an adjusted EBITDA loss of $2,400,000 last year. As a reminder, we have provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this afternoon. As of September 3039, the company had cash and cash equivalents of 62,300,000.0 and no short term investments compared to cash and cash equivalents of 16,500,000.0 and short term investments in US treasury bills of 61,700,000.0 as of 12/31/2018. The company had working capital of 69,900,000.0 as of 09/30/2019 as compared to 81,900,000.0 as of as of 12/31/2018.
Before return before turning to a review of our fiscal twenty nineteen financial guidance, I wanted to review two items that were identified as part of the ongoing remediate effort remediation efforts for the company's material weaknesses. The first item related to immaterial errors that were identified in the accounting for certain items included in stock based compensation expense. The company determined that the corrections of these errors are not material to the financial statements, but has elected to correct the financial statements for each respective period. Specifically, the items identified impacted the 2018, the first quarter of 'nineteen, and six months ending June 2019. Note that these items did not impact the 2019.
The second item identified as part of our remediation efforts impacts the financial statements for the 2019. The item identified relates to the accounting for predevelopment activities on certain OEM contracts. The company determined that the correction of these errors are not material to the financial statements, but has elected to correct the financial statements for first quarter twenty nineteen. Our 10 Q for the period ending 09/30/2019 includes a detailed disclosure of these two items and the immaterial revisions to the financial statements in the respective periods. Now turning to a review of our 2019 financial guidance, which we updated in our earnings press release this afternoon.
For the twelve months ending 12/31/2019, we now expect total revenue in the range of $27,400,000 to $27,900,000 representing growth of 64% to 67% year over year. This compares to the company's prior total revenue guidance range of $26,500,000 to $27,500,000 Our updated 2019 total revenue guidance assumes Advanced Energy revenue in the range of approximately 22,200,000.0 to $22,700,000 representing growth of 70% to 74% year over year. This compares to our prior Advanced Energy revenue guidance range of 21,500,000.0 to $22,500,000 The updated Advanced Energy revenue range reflects an increase of roughly $05,000,000 at the midpoint and is driven by our stronger than expected Advanced Energy performance during the 2019. Our updated total revenue guidance also assumes OEM revenue approximately $5,100,000 representing growth of 42% year over year. This compares to our OEM revenue expectation of approximately $5,000,000 representing growth of 38% year over year.
We also increased our profitability guidance for fiscal year twenty nineteen in this afternoon's press release, and we now expect GAAP net loss in the range of $20,300,000 to $19,800,000 compared to our prior guidance range of net loss in the range of 22,400,000.0 to $21,400,000 The midpoint of this new net loss guidance range represents an increase of approximately $1,700,000 compared to the prior guidance range, and the improvement is driven by the combination of better than expected revenue growth in the third quarter, higher gross margins in the third quarter and an increase in gross margin expectations for the 2019. Our new profitability guidance now also assumes adjusted EBITDA loss in the range of $16,900,000 to $16,400,000 compared to an adjusted EBITDA loss from continuing operations of $11,700,000 in fiscal year twenty eighteen. This compares to the company's prior guidance of adjusted EBITDA loss in the range of 18,800,000.0 to $17,800,000 As a reminder, we have included a full reconciliation from GAAP net loss to non GAAP adjusted EBITDA in our earnings press release this afternoon. Lastly, for modeling purposes, we now expect fiscal year twenty nineteen gross margins of approximately 65.5% to 66% this year compared to our prior guidance range of 61% to 62.5%.
The increase in our gross margin expectations for 2019 is driven by the stronger than expected gross margins we reported in the third quarter as well as higher gross margin expectations for the fourth quarter as we experienced the early benefits of our focus on improving manufacturing efficiencies on our handpiece margins. With that, I'll
Speaker 1
turn the call back to Charlie for closing remarks. Charlie? Thanks, Tara. In summary, I couldn't be more proud of the impressive financial and operational performance and the accomplishments made possible by the entire APICS Medical team this quarter. I'd like to thank everyone at APICS Medical for their efforts during the third quarter and their continued commitment to our organization's success.
With stronger than expected Q3 financial results and an improved outlook for the rest of the year, we are raising our 2019 guidance for revenue, net loss and adjusted EBITDA loss. Looking ahead, we will continue to drive growth in our Advanced Energy business, execute against our strategic objectives, and invest thoughtfully to capitalize on the strong global demand that exists for our innovative advanced energy technologies and establish ourselves as a leader in the global cosmetic surgery market. With our unique energy solutions, dedicated employees, and well capitalized balance sheet, we believe we're poised to reshape what's possible in the cosmetic surgery market and achieve strong returns for our shareholders. With that, operator, let's now open the call for questions.
Speaker 0
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you'd like to ask a good additional questions, we invite you to add yourself to the queue again by pressing star one.
And our first question comes from Matt Hewitt with Craig Hallum Capital. Please go ahead.
Speaker 3
Yes. This is Lucas on for Matt Hewitt here at Craig Hallum. I guess my first question relates to international. It sounds like things are going pretty well on that front. But could you give us some color on maybe how many other clearances are in the works and if there's any that could potentially hit before the end of the year?
Speaker 4
Yes. Obviously, the international business is very important for us
Speaker 1
in pursuing registrations in the OUS markets. And obviously, I've mentioned before that we want to own them. The timing is hard to predict because each country is a little bit different and we're not in control of that. But we have entered four new countries in 2019, two of which were Canada and Mexico. And we're our guidance going forward does not contemplate any new material countries, in 2019.
Speaker 3
Okay. Fair enough. And then I guess turning to your clinical trials, you know, you touched briefly upon the skin laxity trial. Could you maybe walk us through what the next steps would be if that trial is successful?
Speaker 1
Yeah. So, if you remember, we've got a, 20 patient pilot study for safety to submit to the FDA. And so we have, as I mentioned, started enrollment for those patients. And, once we finish those patients and submit that data to the FDA, then the FDA will get back to us and let us know if they're happy with that. And if they are happy with that, then we will move to phase two, which is the 32 subjects.
And then we've got to wait six months for everybody to get better so we can see the, the effectiveness at that point in time.
Speaker 3
Okay. Thank you very much. That's all I had.
Speaker 1
Appreciate it.
Speaker 0
Your next question comes from Kyle Basu with Dougherty. Your line is open.
Speaker 4
Hey, Charlie and Tara. Good evening. Another really strong quarter here. Thank you, Kyle. Regarding the the skin laxity trial, just to confirm, all the patients will be having standalone Renuvion therapy only.
They they won't have lipo in conjunction as well. Correct? And then on the primary endpoint greater than seventy five percent that the subjects must have in their six month images to be correctly identified. Can you speak to how you arrived at that seventy five percent cutoff? Thank you.
Speaker 1
So, yes, you are correct in that the patients will be having Renuvion only and no lipo. So that is part of the, acceptance for the patients that have to be part of the, the study. The seventy five percent that they will be subject to is in conversations with us, with the FDA, of what they would like to see in order to give approval. And remember in this study in particular is the before picture and the after picture are shown, side by side. And so what they need to show is the independent photographic reviewers need to be able to identify the before and correctly identify the after to show the skin laxity.
Speaker 4
Okay. Got it. So they'll they'll be showed in conjunction. I think in the previous trial, that was not the case. Correct?
Speaker 1
That's that's correct. In the previous trial, they were randomized images. In this trial, you will see the the reviewers will see the before picture. They will see the after picture, and they will have to correctly identify each one.
Speaker 4
Okay. Okay. Perfect. That's great. And on the dermal resurfacing study, so glad to hear you've selected and trained the sites.
You incorporated your feedback in the IDE application. Have you resubmitted that? And and when might we, start kinda enrolling for this trial? Any sort of timeline? Thanks.
Speaker 1
Yeah. We our expectation is that we we expect to begin enrolling by the end of the year. And when we, you know, when we get that, official go ahead from the FDA, we will obviously let you know at that point in time. But our our expectation is that we'll begin enrollment by the end of the year.
Speaker 4
Okay. And then lastly, if I can just sneak one more in. You've seen some obviously explosive growth year to date from both handpiece and generator sales. We're we're certainly hearing in the field about strong demand. So on the supply side of things, can you provide maybe a little bit more color around the lean initiatives that Laura and Craig have been working on?
And, additionally, would just love to hear how you're feeling about keeping up with demand in general on the handpiece side. Thank you.
Speaker 1
Yeah. Yeah. No. Thank you, Kyle. Well, as you know, from being somebody that's been here, since I've been here is that it's been a focus of ours from the very beginning for our operational excellence and it's been something that in order to scale a business that you have to, you you you to be able to keep up with demand.
And I can say that we're doing a very good job of keeping up with demand. And as I mentioned in the prepared remarks today, I'm incredibly proud of the work that the whole operations team is doing because now we're actually starting to see some, lower costs in our products because of the work that they are doing. And so, it's it's incredibly nice that we've been focused on this for a while, and it's it's wonderful to start to get to see some of that, some of their hard work get to show in the financial results.
Speaker 4
Okay. Great. Thanks for the updates, Charlie. I'll jump back in queue.
Speaker 1
Thank you.
Speaker 0
Your next question comes from Matthew O'Brien with Piper Jaffray. Your line is open.
Speaker 5
Good afternoon. Thanks for taking the questions. Just for starters, Charlie, the Q3 strength was great to see, obviously, sequentially in what's a seasonally slower period typically. So can you talk about really specifically where some of that came from, be it new accounts, existing accounts, going deeper with handpieces? And then can you fold within there how this new operating lease arrangement with MedShift could impact the business going forward?
How do we how do we think about the impact, both pros and cons?
Speaker 1
Yeah. Okay. The thank you. Yeah. The business was strong both in The United States and outside The United States, and it was both in adoption of new customers and increased utilization.
And so it was a it was a wonderful quarter from both sides from both sides of the pond. I think that if you look at the, you know, the The US growth was was way up and so was the, international growth. So that was very good. And specifically to MedShift, when you're talking about that, the way I would look at MedShift is MedShift is another, option that our reps have for our customers to be able to acquire our technology. So currently, if you're a rep, you can have a prospective customer.
They can buy it directly from us. They can lease it from us. Or they can, have a subscription model through MedShift where they, they pay a monthly subscription fee. And along with that, they get marketing help and web development and some analytics through that. And so for us and our reps, it is just another way for our, end users to acquire the technology.
And from the reps perspective, they're agnostic to which one that they, which path that our customer chooses. We're excited about the, the partnership that we have with MedShift, but it's but it's early in in in the, in the relationship. And so we'll see how this plays out in the in the months and quarters to come.
Speaker 5
Okay. And then as a follow-up, and I actually have two questions. I'll just ask them both here. But on the, on the new handpieces side of things, do you think you can get some pricing premium on either or both of those products? And then for Terra, the leverage that we're seeing here in in q three, not just on the gross margin line, elsewhere is really strong.
So I'm I'm struggling a little bit with getting the model to, you know, to the guidance range here in q four. So can you talk about some of the puts and takes? I'm sure our deals spike up a little bit with more of these these studies that you're running, but just other other things that that could be hitting in q four that that may not have hit in q three because, again, it looks like it looks like there's a ton of leverage that we saw here in q three. Thank you.
Speaker 1
Well, the first question on the handpieces is we'll always be looking in the marketplace to be able to maximize the amount that we can charge for our handpieces but also fit within the business needs of our customers and our partners. And so we will look to we will always look to balance that to make sure that they're getting what they need from us and that we as a company are getting the appropriate, gross margin on that. And so we're excited about having these new handpieces. These new handpieces will definitely, help us especially next year, and, we should start to see a little bit higher gross margins because of that.
Speaker 5
And then tariff for the leverage?
Speaker 2
Yeah. I mean, the gross profit is definitely the primary driver of that. If if we look at, the guidance, it's it's basically up a million and a half, and it's think about it roughly as a third, a third, a third, a third of upside revenue in q three, a third from better than expected gross margin in q three, and then a third from higher gross margin expectations in q four. I think that definitely on the r and d, there will be a pickup in the fourth quarter, continued pickup in in expenses related to the clinical studies. And, obviously, we continue with the registrations of our product in the various countries that come at a cost.
Speaker 5
Thank you.
Speaker 1
Thank you.
Speaker 0
Your next question comes from Russell Cleveland with Ren Capital. Your line is open.
Speaker 6
Thanks so much for taking my call here. Thanks again for the excellent results. It was terrific. So congratulations on that. A clarification on the FDA.
You may have partially already answered this. So we have have we submitted to the FDA our test procedure, using the different doctors and our procedure we're going to use for the facelifts, and we are now awaiting their approval of the program or we're waiting to to, issue our our, recommendation. So can you clarify that one?
Speaker 1
Yeah. We, as as you know, we talked about a application on July 23, and then we got feedback from them. We took their feedback. We didn't have to, but we decided to take their feedback. And we are waiting, we're waiting on their approval of the feedback, which which we did take a lot of their feedback.
So we don't see that there's an issue with that. But we are waiting on approval before beginning enrollment, and we expect that to be by the end of the year.
Speaker 6
Okay. So will we put out an announcement that we are undertaking the the new FDA study or or not?
Speaker 1
Correct. Correct. When we start enrollment, we will we will let, we will let you all know that enrollment has begun. That's correct.
Speaker 6
Okay. Great. Well, thanks again for the numbers.
Speaker 1
Thank you, Russell.
Speaker 0
That does conclude our conference for today. Thank you for participating.