T2 Biosystems, Inc. (NASDAQ:TTOO) Q3 2023 Earnings Call Transcript

T2 Biosystems, Inc. (NASDAQ:TTOO) Q3 2023 Earnings Call Transcript October 12, 2023

Operator: Greetings. Welcome to T2 Biosystems Preliminary Third Quarter 2023 Financial Results and Business Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Trip Taylor, Investor Relations. Trip, you may begin.

Trip Taylor: Thank you, operator. I'd like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Those include statements related to T2 Biosystems’ future financial and operating results and plans for developing and marketing new products. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these statements, including the risks and uncertainties described in T2 Biosystems’ annual report on Form 10-K filed with the SEC on March 31, 2023, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I would like to turn the call over to Chairman and CEO, John Sperzel. John?

John Sperzel: Thank you all for joining our third quarter 2023 results and business update call. Today, I will start by discussing our market opportunity and performance during the third quarter, including both the progress we have made across our three corporate priorities and updated financial outlook for the remainder of 2023. I will then address the press release that we issued earlier today before providing closing remarks and opening the call for questions and answers. Our mission at T2 Biosystems is to fundamentally change the way medicine is practiced through transformative, culture-independent diagnostics that improve the lives of patients around the world. We are applying our patented technology in three areas, sepsis, bioterrorism, and Lyme disease.

These three markets also share a common need that we will discuss during today's call. That is the need for rapid detection and targeted treatment. Importantly, we believe these markets collectively represent a multi-billion dollar market opportunity. Sepsis continues to exact an enormous human and economic toll. Sepsis is the number one cause of death in US hospitals, claiming the lives of 270,000 Americans annually, plus another 80,000 who die in hospice each year. Sepsis is the number one cause of US hospitalization, costing our healthcare system an estimated $62 billion annually. Finally, sepsis is the number one cause of 30-day re-hospitalization in the US, causing 19% of sepsis survivors to be re-hospitalized within 30 days and 40% within 90 days.

T2 Biosystems’ products, including the T2Dx Instrument, the T2Bacteria Panel and the T2Candida Panel, are the only FDA cleared products able to detect sepsis causing pathogens directly from blood in just three to five hours without the need to wait days for a positive blood culture. The need for rapid pathogen detection and targeted antimicrobial treatment is critical for patients at risk of sepsis, as data shows that mortality risk increases by up to 8% for each hour of delayed targeted antimicrobial therapy. A meta-analysis was completed analyzing 14 controlled studies comparing our sepsis products to blood culture-based products. The results, published in a peer-reviewed medical journal, showed T2 Biosystems’ products identified sepsis-causing pathogens 77 hours faster than blood culture based products, allowed patients to receive targeted antimicrobial therapy 42 hours faster than blood culture based products, allowed de-escalation of empiric antimicrobial therapy seven hours faster than blood culture based products, and allowed patients to leave the ICU or hospital five days faster than blood culture based products.

We believe the comparative advantages offered by our products over blood culture based products are the key to improving patient outcomes, reducing costs, and addressing the global threat of antimicrobial resistance. The T2 Biosystems team achieved a number of important milestones during the third quarter of 2023, which we believe have better positioned the company for near and long-term success. We received FDA 510(k) clearance for the T2Biothreat Panel. We received FDA breakthrough device designation for the Candida auris test. We filed the FDA 510(k) submission for the expanded T2Bacteria Panel. We converted 20% of our debt to equity. We raised additional capital, and we regained compliance with NASDAQ market value of listed securities requirement.

Our preliminary financial results for the third quarter of 2023 include total revenue of $1.5 million, which was comprised entirely of non-COVID product revenue, compared to $3.7 million in the prior year period. The decline was primarily due to a $1 million reduction in BARDA of revenue, a $0.4 million sepsis test backorder, a $0.3 million reduction in international T2Dx instrument sales, and a $0.3 million reduction in COVID-19 test sales. The sepsis test backorder directly impacted T2Dx instrument and sepsis test demand during the third quarter and led to performance below our expectations. I'll discuss the actions we took and the progress made to address the backorder during our operations update. However, I'm pleased to report that as of today, we have already resolved the majority of the backorder that existed as of September 30th.

We expect fourth quarter 2023 sepsis and related product revenue of $2.4 million, representing a sequential quarterly increase of 60% compared to the third quarter of 2023. As a result of the sepsis test back order, we expect total 2023 sepsis and related product revenue of $7.5 million, representing a decline of 10% compared to 2022. As we have previously disclosed, there will be no BARDA revenue in the fourth quarter of 2023. We are very pleased with the recent progress in strengthening our balance sheet. As of September 30th, 2023, cash and cash equivalents totaled $24.3 million, including proceeds raised through our ATM facility during the quarter. We reduced our debt and quarterly interest payments by converting $10 million, or approximately 20%, of the CRG term loan to equity.

We also implemented operating expense reductions at the end of the second quarter and headcount reductions throughout the first half of the year, which we have held at under 100 full-time employees. As we advance our mission, we remain focused on three corporate priorities. One, accelerating our sales. Two, enhancing our operations. And three, advancing our pipeline. We'll discuss each of these priorities in more detail. Starting with our first priority, accelerating our sales. Commercially, we're focused on expanding the installed base of T2Dx instruments and increasing sepsis test utilization in existing and new hospital accounts. In the third quarter, we executed contracts for five T2Dx instruments, including two in the US and three outside the US.

We achieved total revenue of $1.5 million, comprised entirely of sepsis and related product revenue. Sepsis test panel revenue was $1.1 million, and we ended the quarter with a $380,000 backorder, demonstrating continued demand for our products. Our commercial team is targeting new hospital accounts while working with existing accounts to increase their sepsis testing volumes. We have integrated the sales, medical affairs, and service teams to educate and align key stakeholders on broader sepsis testing protocols. Annualized US sepsis test utilization during the third quarter was $108,000 per instrument, which was impacted by the sepsis test backorder. We believe our integrated commercial approach and clearing a substantial portion of the backorder can drive deeper penetration within each account over the near term.

In a number of hospital accounts, annualized utilization is well above the $200,000 goal we expect to achieve on an annualized basis over time across our US installed base. As a testament to our commercial team's strong efforts in increasing education and identifying use cases, our customers have continuously demonstrated their support by presenting case studies highlighting the benefits of our products at industry conferences. During the September Sepsis Alliance Summit, Butler Hospital presented on the critical need our products fill in accelerating pathogen identification time, enabling a rapid diagnosis with independent species identification. As we discussed on the previous call, Butler Hospital has developed a protocol to trigger the use of the T2Bacteria Panel and have shown that the T2Bacteria Panel allowed for targeted therapy as much as 37 hours faster than blood culture based methods.

At the upcoming IDWeek Conference in Boston, tomorrow, October 13, hospital experiences with T2Candida and T2Bacteria will be presented by infectious disease pharmacists from the University of Louisville Health System and Robert Wood Johnson University Hospital. Creating additional reference accounts like these hospital users is an important part of our commercial strategy. We're grateful for our strong customer support as they spread more awareness around our instruments' clinical and economic benefits. We continue to add to the clinical library and this past quarter have been conducting studies to advance the capability to test in new ways. As a reminder, we announced a clinical collaboration with Vanderbilt University Medical Center during the second quarter to implement and evaluate our FDA-cleared T2Dx instrument and T2Bacteria Panel in a clinical setting.

Included in the clinical collaboration is a prospective study that will assess the capabilities of the T2Bacteria Panel to improve clinical interventions and antibiotic usage for patients with a bloodstream infection. The T2Dx instrument has been installed at Vanderbilt. The IRB has been approved, and patient enrollment is expected to begin next month. We look forward to discussing future updates on this collaboration and clinical evidence once available. Bolstering our efforts is the increasing awareness of sepsis as a public health emergency. In September, we promoted Sepsis Awareness Month. September is recognized as a month to reflect upon the fact that sepsis takes a life every 90 seconds in the United States. Thomas Heyman, CEO of Sepsis Alliance stated, “Sepsis is a public health crisis that no one is talking about.” We appreciate the work Sepsis Alliance is doing to raise awareness and educate people regarding sepsis.

We commend Massachusetts Governor Maura Healey for recognizing the patient impact of sepsis and for issuing a proclamation to recognize September as Sepsis Awareness Month in Massachusetts. We also applaud the United States Centers for Disease Control and Prevention, or CDC, for taking action to streamline US hospitals' sepsis program guidelines through their hospital sepsis program core elements. The program is designed to help hospitals to implement, monitor, and optimize sepsis programs through seven elements, hospital leadership commitment, accountability, multi-professional expertise, action, tracking, reporting, and education. By establishing these core elements, they aim to improve upon old disjointed processes that have failed patients and created a massive burden for our healthcare system.

It's extremely encouraging to have these additional stakeholders prioritize awareness and calling for action to combat the public health threat of sepsis. Our message is being amplified by these external voices, and we expect this to stimulate additional conversations with potential customers and advance current dialogues. It's clear the significant change is required for how we manage patients suspected of sepsis. We're confident the growing public recognition can be a catalyst for positive change and that adoption of our sepsis products in US hospitals will advance the standard of care. Following the FDA approval of the T2Biothreat Panel, we immediately shifted our focus with this product toward commercialization. We believe there are multiple opportunities to sell the T2Biothreat Panel, including to the US Laboratory Response Network, state or public health labs, the US Strategic National Stockpile, other government agencies, for example, CDC, NIH and Department of Defense and international governments that are US allies.

Given the ongoing wars in Europe and the Middle East, we believe the global population is at an increased risk for exposure to bioterrorism. We're proud to have developed a test to protect Americans from the consequences of deliberate or naturally occurring outbreaks of certain biothreat pathogens. Moving to our second priority, enhancing our operations. On our last call, we discussed numerous steps we had taken to enhance our operations, including our cost structure, balance sheet, supply chain and manufacturing. Since our last call and the close of the third quarter, we have made significant progress addressing our manufacturing processes aimed at resolving the sepsis test panel backorder. At the end of the third quarter, the sepsis test panel backorder was $380,000.

And I'm pleased to report that we've cleared the majority of the backorder in early October. We expect to clear the remainder of it this quarter and we expect to finish 2023 with zero backorder. The backorder was caused by a number of factors, including raw materials, personnel changes, processes and equipment. We attribute the recent manufacturing improvements to the key measures we have previously implemented, including hiring a new Vice President of Operations, advanced procurement of raw materials, process improvements and investments in equipment. The demand for our sepsis test panels within the US and international markets remains strong. Moving to our third priority, advancing our pipeline. Our new product development priorities have targeted three areas, sepsis, bioterrorism and Lyme disease.

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These represent areas of significant unmet medical need in which rapid detection can lead to faster targeted antimicrobial treatment and improved patient outcomes. We've been advancing five new products intended to expand the test menu on our FDA-cleared T2Dx instrument and drive increased adoption, including the T2Biothreat Panel, the addition of Acinetobacter baumannii to our FDA-cleared T2Bacteria Panel, the T2Resistance Panel the T2Lyme Panel and a Candida auris test. Each new test panel or test represents a differentiated solution to rapidly identify harmful pathogens and potentially allow clinicians to achieve faster targeted antimicrobial therapy. The T2Biothreat Panel is a direct-from-blood, molecular diagnostic test that runs on the FDA-cleared T2Dx instrument and simultaneously detects six biothreat pathogens in four hours, including the organisms that cause anthrax, tularemia, glanders, melioidosis, plague and typhus.

If not treated promptly, infections with the pathogens included on the T2Biothreat Panel can result in mortality rates of 40% to 90%, according to medical aspects of biological warfare and the Center for Food Security and Public Health. The T2Biothreat Panel clinical evaluation assessed the sensitivity and specificity to detect targets in blood samples containing a range of bacterial concentrations. The positive percent agreement or sensitivity for all targets at one to three times the limit of detection was 100% for all targets, except Francisella tularensis, which was 94.3%. The negative percent agreement or specificity for all six targets in healthy and febrile blood containing no bacteria was 100%. We believe this represents unparalleled performance.

As expected, we received FDA 510(k) clearance for the T2Biothreat Panel during the third quarter of 2023. We which allows us to market and sell the test in the US. The FDA 510(k) clearance marks a major milestone in our collaboration with the US government, specifically BARDA, and our commitment to protect Americans from the consequences of deliberate or naturally occurring outbreaks of these biothreat pathogens. It's important to note that the T2Biothreat Panel is the first and only FDA-cleared product able to simultaneously detect these six high-priority biothreat pathogens and the only FDA-cleared multi-target biothreat product developed and manufactured by a US-owned company. We believe these facts will be important in discussions regarding purchases of the T2Biothreat panel, which we intend to sell to commercial markets and governments.

The expanded T2Bacteria Panel to include detection of Acinetobacter baumannii is a direct from blood molecular diagnostic tests designed to run on the FDA-cleared T2Dx instrument and provide results in just three to five hours without the need to wait days for a positive blood culture. Adding Acinetobacter baumannii detection to our FDA-cleared T2Bacteria Panel will expand our detection capabilities to approximately 75% of all sepsis-causing bacterial pathogens commonly found in blood culture. Acinetobacter baumannii can cause bloodstream infections, especially in critically ill patients, which can range from benign transit bacteremia to septic shock and has been reported to have accrued ICU mortality rate of 34% to 43%. Acinetobacter infections rarely occur outside of healthcare settings in the United States and can disproportionately impact those with weakened immune systems, chronic lung disease or diabetes.

Acinetobacter baumannii can be resistant to many antibiotics, including carbapenems, which highlights the importance of rapid detection and targeted antimicrobial treatment. Today, we issued a press release to announce that we have filed an FDA submission for 510(k) clearance to add Acinetobacter baumannii to the T2Bacteria Panel as scheduled. As a reminder, the CE marked version of the T2Bacteria Panel, which we sell in certain international markets already includes the detection of Acinetobacter baumannii. The T2Resistance Panel is a direct from blood molecular diagnostic test designed to run on the FDA-cleared T2Dx instrument and simultaneously detect 13 antibiotic resistance genes known to cause antibiotic-resistant infections in just three to five hours without the need to wait days for a positive blood culture.

The T2Resistance Panel, which is marketed and sold in Europe under CE Mark, detects resistance genes that may confer resistance to common antimicrobials such as carbapenems, methicillin and vancomycin. We have advanced the US clinical trial, including completing patient enrollment and we plan to file an FDA submission for 510(k) clearance after completing additional internal testing, including stability testing, which we expect to occur in the first quarter of 2024. As a reminder, the T2Resistance Panel was granted breakthrough device designation by the FDA, which provides for a prioritized review process upon FDA submission. The T2Lyme Panel is a direct from blood molecular diagnostic test designed to run on the FDA-cleared T2Dx instrument and detect Borrelia burgdorferi, the bacteria that is the major cause of Lyme disease in the US.

The T2Lyme Panel is intended to test individuals with signs and symptoms of Lyme disease and aid in the diagnosis of early line disease. And we believe it will provide a significant advantage over currently recommended serological testing that requires the presence of antibodies, which can take the body two to six weeks to create post infection. In 2022, our T2Lyme Panel was named a winner in the Lyme Innovation Accelerator, or LymeX, a partnership between the US Department of Health and Human Services and the Steven & Alexandra Cohen Foundation. The largest public-private partnership for Lyme disease that plans to award up to $9 million to future award winners. We've recently received additional interim funding from Lymex and submitted a Phase II progress report, which will be evaluated for moving to Phase III of the accelerator.

We also received FDA breakthrough device designation for the T2Lyme Panel, which allows for a prioritized review process upon submission to the FDA. We've completed the early assay development for the T2Lyme Panel, and we established a preliminary level of detection or LOD of 2 CFU per ml. We're in discussions regarding the potential to initiate commercialization of the T2Lyme Panel as a laboratory developed test and subsequently plan to commence a US clinical trial to support submission for 510(k) clearance to the FDA. The Candida auris test is a direct from blood molecular diagnostic test designed to run on the FDA-cleared T2Dx instrument and detect Candida auris species in just three to five hours without the need to wait days for a positive blood culture.

Candida auris is a multidrug-resistant fungal pathogen that has a mortality rate up to 60% and is recognized as a serious global health threat by the CDC and the World Health Organization. Candida auris is difficult to identify with standard laboratory methods, which can lead to inappropriate treatment. The CDC estimates the costs associated with US fungal diseases in general are as high as $48 billion annually and has called on public health professionals to help lower the burden of fungal disease by continuing to raise awareness of the life-saving benefits of early detection and proper treatment. As a reminder, we currently market and sell the T2Candida Panel, the only FDA-cleared diagnostic test able to detect sepsis causing candidate pathogens directly from blood in just three to five hours without the need to wait days for a positive blood culture.

The T2Candida Panel runs on the FDA-cleared T2Dx instrument and simultaneously detects five candidate species, including Candida albicans, Candida tropicalis, Candida parapsilosis, Candida krusei and Candida glabrata, which causes over 90% of Candida blood infections. Rapid detention of these packages as well as Candida auris is essential to getting infected patients on targeted antifungal therapy and improving patient outcomes. During the third quarter of 2023, we received FDA breakthrough device designation for the Canada auris test, which provides greater and more frequent access to the FDA and may accelerate our path to FDA clearance. Regarding our longer-term product development initiatives. While we met all milestones set forth in the BARDA contract related to the next-generation instrument and comprehensive sepsis panel or AMR panel, BARDA informed us that our milestone-based product development contract ended on September 15, 2023, upon the expiration of option three.

Following the recent FDA 510(k) clearance for the T2Biothreat Panel and the recently completed patient enrollment for the T2Resistance Panel, BARDA has decided not to fund additional product development under this contract. We may apply for additional BARDA funding under new contract solicitations. Earlier today, we issued a press release announcing a reverse stock split at a 1 to 100 ratio effective today, October 12, 2023, and to begin trading on a split-adjusted basis when the market opens tomorrow, October 13, 2023. Proportional adjustments will be made to the number of shares of common stock reserved for issuance under the company's equity incentive plans and the number of shares of common stock subject to outstanding warrants, convertible preferred and Series A stock held by CRG Servicing LLC and equity awards as well as the applicable share price.

The reverse stock split will not affect the number of authorized shares of the company's common stock or the par value of the common stock. As a reminder, NASDAQ Capital Market listing rules require the company to maintain a market value of listed securities of at least $35 million and a minimum bid price of $1. On July 6, 2023, a we participated in an appeal hearing with the NASDAQ that led to a formal response approving our appeal and granting an extension to regain compliance until November 20, 2023. As previously reported, we regained compliance with the market value of listed securities requirement on August 7, 2023. While we have seen an increase in our stock price since the July 6 NASDAQ hearing, our stock price has not increased enough to achieve the minimum bid price organically.

Therefore, our Board of Directors has decided to affect the reverse stock split to bring the company into compliance with the minimum bid price and maintain our NASDAQ listing. We believe it's in the best interest of the company and our stockholders to maintain our NASDAQ listing for several reasons. One, to maintain liquidity for the stock. Two, to broaden opportunities for future access to capital. Three, to attract and compensate employees. And four, to pursue potential mergers and acquisitions. I also want to clarify how this impacts the actions we have taken to reduce our debt and quarterly interest payments. In July, we announced the conversion of $10 million or approximately 20% and of our term loan with CRG Servicing LLC, or CRG, into 48,345,798 shares of common stock which CRG sold during September 2023.

Additionally, CRG is entitled to convert 93,297,259 shares of Series B convertible stock into shares of common stock. As a result of the reverse stock split announced today, the Series B convertible preferred stock would convert to 932,973 shares. In summary, we achieved important milestones across our three corporate priorities during the third quarter of 2023. Commercially, we continue to increase our global T2Dx instrument installed base, maintained strong demand for our sepsis test panels, raise awareness of the value of our products directly and through key opinion leaders and clinical evaluations and prestigious hospitals like Vanderbilt University Medical Center. Operationally, we strengthened our balance sheet, and we've made significant progress in our supply chain and manufacturing operations to address the sepsis test backorder.

Scientifically, we received FDA 510(k) clearance for the T2Biothreat Panel, received FDA breakthrough device designation for the Candida auris test, filed the FDA 510(k) submission to add detection of Acinetobacter baumannii to the T2Bacteria Panel and advanced the T2Resistance Panel toward FDA 510(k) submission. I'd like to turn the call back over to the operator to open the line for questions. Operator?

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Kyle Mikson from Canaccord. Kyle, your line is live.

Kyle Mikson: Hey, guys. Thanks for taking the questions. Congrats on the FDA news. Just on the financials in the quarter. So last quarter, you exited with a backorder of $350,000. This quarter, you ended with a back order of $380,000. It's pretty close to net neutral. I just -- wouldn't this quarter, like, this result here be kind of a normalized quarter. I guess, is that like the wrong way to think about it? It just seems like the $380,000 was a headwind or characterized as a headwind. I’m just wondering if you could like dive into that a little bit more. And secondly, this whole, like, [indiscernible] recognition, the backorder situation, is that -- just remind me, are you confident that can end soon or is that going to just continue going forward? Thanks.

John Sperzel: Sure. Thank you, Kyle. John Sprague isn't available today, so I'm going to take that question. The first thing on the backorder at the end of the second quarter compared to the backorder at the end of the third quarter, it's not really the same backorder. So we cleared the majority of the back order that ended -- we ended the second quarter with. Obviously, we weren't able to make and ship enough product based on the demand that we had for the third quarter. So we ended the third quarter with a backorder. They happen to be of similar size, but that's more by coincidence than just one moving on to the next quarter. As far as the end date, we have already cleared the majority of the back order that $380,000 that we ended Q3 with.

We expect to continue clearing that over the next week. We expect to have zero backorder at the end of the fourth quarter, and we believe that the mitigations that we put in place to address it both in the second quarter and in the third quarter are working, and we expect it to be completely resolved this quarter.

Kyle Mikson: All right, great, that was super helpful. And maybe, John, could you talk about the incremental market opportunity that this new pathogen provides that you announced in the press release with the FDA? Just, I think you mentioned like 75% of pathogens now for bacteria, but what does that mean in terms of like dollars or just opportunity in general?

John Sperzel: Well, I think it's really important Kyle and thanks for asking that question. One of the pushbacks that we get, certainly from competitors, but often also from customers, is why would I bring on a technology that can only identify five or in the case of adding Acinetobacter, six bacterial pathogens. Like, how is that going to help me in my sepsis protocols and manage my patients at risk of sepsis? Interestingly, when we ask them to show us the positive blood cultures, positive bacterial blood cultures, typically what we see is the five pathogens and now of course six, cover somewhere between 70% and 80% of the positive bacterial specimens that they see. They're generally surprised by that. And so the importance of adding Acinetobacter is we take our detection capabilities when you look at all the data that's out there from approximately 70% with five pathogens to approximately 75% with six pathogens.

And the other thing that's really important, just to remind everyone that the pathogens that we have on our T2Bacteria Panel were chosen for a reason. One, because we get pretty broad coverage with five and now hopefully six targets, but also because those are the targets that are generally resistant to broad spectrum empiric antimicrobial or in this case antibiotic treatment. So we chose them for a reason, they're resistant to broad spectrum, and because of that they lead to the longest hospital stays, the greatest cost, and the worst patient outcomes. So we're obviously super excited to add Acinetobacter. We have it internationally, and it has been an important part of driving adoption outside the US.

Kyle Mikson: Okay, that's interesting. Thanks, John. On the instrument placement side, so five in the quarter executed -- annualized, that's 20, and you did 51, I guess, last year for full year. Can you just talk about the dynamics in terms of like demand for instruments, or maybe bottlenecks in terms of, like, shipments or something? And internationally, you actually had a stronger quarter than domestic. I mean, there's a lot of macro headwinds kind of going on. I would have figured that might have been weaker, but I just wanted to give you the opportunity to kind of talk about the placement situation.

John Sperzel: Sure. I wouldn't read anything into the international demand versus domestic demand. I think at a high level, it's generally easier to drive adoption in markets outside the US. The US is the strictest regulatory environment. That's why historically when you look at how most new companies introduce new products to the market, they start in Europe, and then they come to the US. So I think that's actually a positive. We're obviously disappointed with five instruments. That's not where we expect to be. The backorder absolutely impacted that. We -- the other impact of a backorder is we couldn't get new customers to go live as fast as we wanted them to. So instruments that we shipped in Q2 were still backlogged in terms of going live as well as instruments in Q3 because we needed to take care of our existing customers first.

So the backorder doesn't just impact the potential sales in the quarter, but it also impacts going live with instruments, and it impacts selling instruments to new customers or additional instruments to existing customers. So it impacted the whole business. Again, that's why we put so much emphasis on resolving it and why we feel good about it being completely resolved in the fourth quarter.

Kyle Mikson: Okay. And there's one more and I'm going to hop back after that. The gross margins, that's a key metric that you've been trying to improve. Maybe just talk about how that progressed in the quarter. We don't really have visibility into that, I think, here in the press release. And then, how does the backorder situation kind of impact that? Because you would think that maybe it's all test, [indiscernible] revenue, that's higher margins recurring. So how do all these moving pieces sort of fit together, I guess, with gross margin? And how is that improving?

John Sperzel: So you're absolutely right, Kyle. Having lower test sales, which is the razor blade of the razor/razor blade model is not favorable when it comes to gross margins. We haven't finalized our Q3 results. They're obviously still subject to review. So we're not reporting on gross margins yet. We'll do that in the normal course in the first half of November.

Kyle Mikson: Okay. How about cash burn? Is that something you can kind of comment on possibly just given it's a profitability type metric, I guess?

John Sperzel: Well, we finished the quarter with $24.3 million in cash. We had finished Q2 with 16.1%. We're obviously in a better cash position. Our balance sheet has strengthened also through the conversion of debt to equity and the lower interest payments that go along with that. So we feel much better this quarter with the cash position and the runway than where we were at the end of Q2.

Kyle Mikson: It was more of like a going-forward type question, but that sounds good. All right, thanks so much for the time. Appreciate it.

John Sperzel: Thank you, Kyle.

Operator: Thank you. The next question is coming from Ben Haynor from Alliance Global Partners. Ben, your line is live.

Ben Haynor: Good afternoon, gentlemen. Thanks for taking the question and congrats on the Q2 Biothreat clearance. First off for me, you mentioned, I don't know, five, six potential customers for the T2Biothreat Panel. How many of those institutions or agencies have you've been in contact with? How are the discussions coming there? Any color that you can provide?

John Sperzel: Sure, Ben. First of all, thanks for the question. The first thing I want to do is just three really important points about the T2Biothreat Panel, and just really emphasized these. The first is that the targets -- the six targets that are on our panel are unique. The T2Biothreat Panel is the first and only FDA-cleared product able to simultaneously detect those six high-priority biothreat pathogens. There is another multi-target biothreat product that is manufactured by a French owned company. Three of the targets are similar to our panel, three of them are not, that product is entirely controlled by Department of Defense, ours is not. So we have unique targets. The second point I want to make is that we believe the performance of our product, the sensitivity and specificity is unparalleled.

The sensitivity was 100% on five targets and 94.3% on the other, and the specificity was 100% across all six targets. I've not seen that kind of performance in a multi-target molecular diagnostic test outside of BioThrax, certainly not within. And then the third, which I think is really important when we talk about procurement of this test or sales of this test to US government entities. This product is made by a US-owned company. It's the only FDA-cleared multi-target biothreat product developed and manufactured by a US-owned company. And with the Buy America First mandate, we think that's going to be important. So to your question about the target market opportunities, I mean just to reiterate them, the US lab response network is about 30 labs across the United States that routinely test for these kind of pathogens and others.

So that's a clear opportunity. State and public health labs, that's within the call point of our current commercial team. The stockpile and other government agencies like CDC, NIH, DoD, those are going to be more of a corporate account type sale that would be made by myself or others in the organization and international government is the same. They would have to be allies of course. And we're actively engaged in those discussions.

Ben Haynor: Okay. And, I mean, is there any sort of timeline that is associated potentially with these things? I mean, is there RFP processes now that it's FDA cleared or anything from any of these folks that or any of these entities that you can kind of hang your hat on or investors can hang their hat on and say, this is what -- is the potential out there?

John Sperzel: Well, I think the good thing is they're all a little bit different. The strategic stockpile, that's obviously a process. It's a government-led process. The LRN labs is probably a little less structured than that, but also it's a government-led process. State and public health labs, those could happen anytime. And as well as international governments. I think there's obviously a lot of emphasis on what's going on around the world and the threat of bioterrorism is real.

Ben Haynor: Okay. That's fair enough. And then on the investments in equipment, on the production side to kind of help deal with the back. Are those significant investments in equipment and do those expand your production capacity? Or what's the right way to kind of wrap your head around those?

John Sperzel: I wouldn't consider them consistent. We're talking about a piece of equipment that might cost $10,000.

Ben Haynor: Okay. So not significant and don't think about it as really expanding capacity or anything like that.

John Sperzel: That's correct.

Ben Haynor: Okay. Great. I think the back-line question has kind of been asked and answered. So I guess I'll leave it at that. Thanks a lot for taking the questions.

John Sperzel: Thank you, Ben. Appreciate it.

Operator: Thank you. There were no other questions at this time. I would now like to turn the call over to John Sperzel for closing remarks.

John Sperzel: Thank you all for participating in our preliminary Q3 results report and business update. We look forward to updating as we go forward. Thank you and have a great night.

Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.