<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934:
For the quarterly period ended September 30, 2000
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934:
For the transition period from _______to_______
Commission file number: 0-12128
MATRITECH, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2985132
-------- ----------
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
330 NEVADA STREET, NEWTON, MASSACHUSETTS 02460
(Address of Principal Executive Offices) (Zip Code)
(617) 928-0820
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 7, 2000, there were 25,220,018 shares of Common Stock
outstanding.
Page 1 of 19
The Exhibit Index is located on Page 19.
<PAGE> 2
MATRITECH, INC.
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999
and September 30, 2000 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 2000 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 2000 6
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
Page 2 of 19
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MATRITECH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $5,612,194 $4,677,146
Accounts receivable, net 211,016 219,009
Inventories 300,897 408,130
Prepaid expenses 112,656 168,555
---------- ----------
Total current assets 6,236,763 5,472,840
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Laboratory equipment 1,454,823 1,771,637
Office equipment 212,698 249,004
Laboratory furniture 62,739 62,739
Leasehold improvements 56,981 56,981
Automobiles -- 31,926
---------- ----------
1,787,241 2,172,287
Less-Accumulated depreciation
and amortization 1,186,501 1,389,353
---------- ----------
600,740 782,934
---------- ----------
Goodwill, net -- 239,876
Other assets, net 65,072 129,288
---------- ----------
$6,902,575 $6,624,938
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3 of 19
<PAGE> 4
MATRITECH, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of note payable $ 76,744 $ 127,064
Accounts payable 274,188 349,434
Accrued expenses 536,745 701,736
Deferred revenue 7,750 9,710
------------ -----------
Total current liabilities 895,427 1,187,944
------------ -----------
NOTE PAYABLE, LESS CURRENT
MATURITIES 63,688 158,775
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
Authorized - 4,000,000 shares
Issued and outstanding - none -- --
Common stock, $.01 par value -
Authorized - 40,000,000 shares
Issued and outstanding - 23,552,984
Shares at December 31, 1999 and
25,096,974 shares at September 30, 2000 235,530 250,970
Additional paid-in capital 52,983,162 57,339,370
Deferred compensation -- (196,441)
Cumulative translation adjustment -- (25,479)
Accumulated deficit (47,275,232) (52,090,201)
------------ ------------
Total stockholders' equity 5,943,460 5,278,219
------------ ------------
$ 6,902,575 $ 6,624,938
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 19
<PAGE> 5
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from product sales $ 129,598 $ 446,047 $ 449,819 $ 775,738
------------ ------------ ------------ ------------
Expenses:
Cost of product sales 148,281 340,106 478,884 663,047
Research and
Development expense 592,380 623,675 2,037,498 1,695,317
Selling, general and
Administrative expense 919,393 1,812,659 2,754,257 3,490,189
------------ ------------ ------------ ------------
Loss from operations (1,530,456) (2,330,393) (4,820,820) (5,072,815)
------------ ------------ ------------ ------------
Interest income 55,179 81,890 153,547 270,505
Interest expense 5,736 4,683 17,205 12,659
------------ ------------ ------------ ------------
NET LOSS $ (1,481,013) $ (2,253,186) $ (4,684,478) $ (4,814,969)
============ ============ ============ ============
BASIC/DILUTED
NET LOSS PER SHARE $ (.07) $ (.09) $ (.23) $ (.20)
============ ============ ============ ============
BASIC/DILUTED
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 21,724,217 25,004,331 20,647,215 24,652,234
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5 of 19
<PAGE> 6
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,684,478) $(4,814,969)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 136,122 127,481
Expense related to common stock warrant issuance -- 510,342
Changes in assets and liabilities -
Accounts receivable, net 7,761 140,208
Inventories (2,507) 4,289
Prepaid expenses 58,469 (31,702)
Other assets -- (43,024)
Accounts payable (116,598) (202,075)
Accrued expenses 127,370 159,784
Deferred revenue -- (177)
----------- -----------
Net cash used in operating activities (4,473,861) (4,149,843)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (27,330) (70,116)
Cash paid for acquisition costs in
purchase of ADL, net of cash acquired -- (89,306)
------------ -----------
Net cash used in investing activities (27,330) (159,422)
------------ -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 6 of 19
<PAGE> 7
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net $3,909,975 $ 284,462
Proceeds from exercise of common stock options -- 450,014
Proceeds from exercise of common stock purchase
Warrants -- 2,892,959
Proceeds from issuance of common stock under
Employee stock purchase plan 3,976 4,500
Payments on notes payable (50,447) (232,239)
---------- ----------
Net cash provided by financing activities 3,863,504 3,399,696
---------- ----------
Effect of foreign exchange on cash and cash
equivalents -- (25,479)
---------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (637,687) (935,048)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,146,821 5,612,194
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $3,509,134 $4,677,146
========== ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 17,205 $ 12,659
========== ==========
IN CONNECTION WITH THE ACQUISITION OF ADL, THE FOLLOWING NON-CASH TRANSACTION
OCCURRED:
Fair value of assets acquired $ 513,498
Goodwill 260,136
Cash paid for acquisition costs, net of cash acquired (89,306)
----------
Liabilities assumed $ 684,328
==========
Issuance of common stock for services to be provided $ 214,300
==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 7 of 19
<PAGE> 8
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION
Matritech, Inc. ( the "Company") was incorporated on October 29, 1987 to
develop, produce and distribute products for the diagnosis and potential
treatment of cancer based on its proprietary nuclear matrix protein technology.
This technology was licensed to the Company by the Massachusetts Institute of
Technology ("MIT").
The Company is devoting substantially all of its efforts toward product
research and development, raising capital, securing partners and marketing
products. The Company is subject to risks common to companies in similar stages
of development, including history of operating losses and anticipated future
losses, fluctuation in operating results, uncertainties associated with future
performance, near-term dependence on a limited number of products, reliance on
sole suppliers, dependence on key individuals, competition from substitute
products and larger companies, the development of commercially usable products
and the need to obtain adequate additional financing necessary to fund its
operations and to develop its future products.
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The results for the interim periods
presented are not necessarily indicative of results to be expected for any
future period. It is suggested that these consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 filed with the SEC (File No. 0-12128).
On June 28, 2000, the Company acquired all of the outstanding shares of capital
stock of ADL-Vertriebsgesellschaft mbH, Gesellschaft fur Allergie, Diagnostika
und Laborkonzepte ("ADL"), a European distributor of diagnostic testing
products, including the Company's NMP22 Test Kit for Bladder Cancer. ADL is
located in Freiburg, Germany. For financial statement purposes, this acquisition
was accounted for as a purchase, and accordingly the results of operations of
ADL from June 28, 2000 forward are included in the Company's consolidated
statements of operations.
The aggregate purchase price of $780,000 consisted of assumed liabilities of
$684,000 and acquisition costs of $96,000. The purchase price was allocated
based upon the fair value of the tangible and intangible assets acquired. Total
tangible assets acquired were $514,000 comprised of current assets of $291,000,
net fixed assets of $202,000 and other assets of $21,000. Goodwill of $260,000
was recorded in connection with the acquisition and is being amortized ratably
over three years.
In connection with the acquisition, the Company issued 37,153 shares of the
Company's common stock to the shareholders of ADL and may issue up to an
additional 13,700 shares of the Company's common stock, based on the achievement
of certain performance objectives during 2000. These shares are restricted
subject to continued employment of the ADL shareholders. The initial issuance of
37,153 shares was valued at $214,300, and is being recorded ratably as
compensation over the three year employment period. The second issuance of
shares will be valued at December 31, 2000 and recorded ratably as compensation
over the remaining employment period.
Page 8 of 19
<PAGE> 9
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma combined results of operations of the Company
assume that the ADL acquisition was completed on January 1, 1999. These proforma
results represent the historical operating results of ADL prior to its date of
acquisition, combined with those of the Company with appropriate adjustments.
These pro forma results are not necessarily indicative of operating results
which would have occurred if the ADL acquisition had been operated by current
management during the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue $ 571,027 $ 446,047 $ 1,944,144 $ 1,468,387
Net loss $(1,632,428) $(2,259,771) $(4,999,247) $(5,065,947)
Net loss per share
- basic and diluted $ (.08) $ (.09) $ (.24) $ (.21)
</TABLE>
2. CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments with original
maturities of 90 days or less. The Company's cash equivalents primarily consist
of auction market preferred stocks and money market accounts at December 31,
1999 and September 30, 2000. The Company classifies its investments in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
3. INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
December 31, September 30,
1999 2000
----------- -------------
Raw materials $179,316 $157,110
Work-in-process 1,464 1,210
Finished goods 120,117 249,810
-------- --------
$300,897 $408,130
======== ========
4. NET LOSS PER COMMON SHARE
The Company applies SFAS No. 128, "Earnings Per Share", for calculating and
presenting earnings per share. Basic net loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
during the year. Diluted loss per share is the same as basic loss per share as
the effects of the potential common stock are antidilutive. Potential common
stock consists of stock options and warrants; and also at September 30, 2000,
the 37,153 shares of common stock held in escrow in connection with the ADL
acquisition, as these shares are contingent upon future employment. The amount
of potential common stock excluded from the computation of diluted net loss per
share at September 30, 1999 and 2000 is 2,010,858 and 1,731,833 shares,
respectively.
Page 9 of 19
<PAGE> 10
5. DEBT ACQUIRED IN ADL ACQUISITION
In connection with the acquisition of ADL, the Company assumed $378,000 of long
and short term obligations. At September 30, 2000 these obligations total
$202,000, with balances and details consisting of the following: a $131,000 loan
from a bank, due in May 2004 which bears interest at 5.2% secured by trade
receivables and inventory; a $45,000 third-party demand note which will be
repaid by the Company and for which the Company will be reimbursed by a key ADL
employee; a $15,000 car loan from a bank bearing interest at 7.50% and due in
March 2003; and a $11,000 car loan from a bank bearing interest at 6.99% and due
in November 2002.
6. SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker or decision
making group, in making decisions about how to allocate resources and assess
performance. The Company's chief decision maker, as defined under SFAS 131, is a
combination of the Chief Executive Officer, President and the Chief Financial
Officer. The Company views its operations and manages its business as
principally one segment, the sale of diagnostic products. Associated services
are not significant. As a result, the financial information disclosed herein
represents all of the material financial information related to the principal
operating segment. All of the Company's products were shipped either from its
facilities located in the United States or since June 28, 2000 from its newly
acquired facilities in Freiburg, Germany.
<TABLE>
<CAPTION>
REVENUE ($ IN 000'S)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 2000 1999 2000
$ % $ % $ % $ %
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 81 62% $ 61 13% $224 50% $185 24%
Japan 25 19 31 7 162 36 112 14
Europe 6 5 310 70 19 4 393 51
Rest of world 18 14 44 10 45 10 86 11
---- ---- ---- ---- ---- ---- ---- ---
Total $130 100% $446 100% $450 100% $776 100%
</TABLE>
7. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years financial
statements to conform to current presentation. These classifications have no
effect on the Company's results of operations or financial position.
8. WARRANT ISSUANCE
In July 2000, the Company issued a warrant to a public relations consultant
for the purchase of 450,000 shares of the Company's common stock for a price of
$2.50 per share expiring in July 2005. The estimated value of these warrants
using the Black-Scholes option pricing model is approximately $2.0 million and
will result in a non-cash charge to operations over the one-year term of the
agreement, with approximately $510,000 included in the quarter ended September
30, 2000. The issuance of the warrants has no impact upon cash until the time of
exercise of the warrants, none of which had been exercised through September 30,
2000.
Page 10 of 19
<PAGE> 11
9. FUTURE ISSUANCE OF SHARES
In August 2000, the Company entered into a common stock purchase agreement
with Acqua Wellington North American Equities Fund, Ltd. covering the sale of up
to $30 million or 2.45 million shares of the Company's common stock. The shares
may be purchased at a small discount to market price at any time beginning in
August 2000 and ending in October 2001. The first sale of 50,369 shares was
completed in September 2000, giving proceeds to the Company of $340,000. The
second sale of 109,449 shares was completed in November 2000, giving proceeds to
the Company of $600,000. Prospectus supplements were filed covering these
shares.
10. LEASE COMMITMENT
The Company's current lease on its space in Massachusetts terminates
December 31, 2000. In late June 2000, the Company signed the first amendment to
the lease agreement which extends the lease term for an additional five years,
ending December 31, 2005, and a five-year option for the period commencing
January 1, 2006. The amendment increases the monthly rent and security deposit;
the remainder of the lease terms are substantially unchanged.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q, other reports and communications to
securityholders, as well as oral statements made by the Company's officers or
agents may contain forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements may relate to, among other things, the Company's future revenue,
operating income, and the plans and objectives of management. In particular,
certain statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in "Factors That May Affect
Future Results" constitute forward-looking statements. Actual events or results
may differ materially from those stated in any forward-looking statement.
Factors that may cause such differences are discussed below and in the Company's
other reports filed with the Securities and Exchange Commission.
The Company was incorporated in 1987 to develop, manufacture and market
innovative cancer diagnostic products based on its proprietary NMP technology.
Matritech has been unprofitable since inception and expects to incur significant
operating losses for at least the next several years. For the period from
inception to September 30, 2000, the Company incurred a cumulative net loss of
approximately $52 million.
In the United States, the Company sells its NMP22 Test Kit through its own
direct sales force, and in March 1998 entered into a distribution agreement with
Curtin Matheson Scientific, now Fisher Healthcare ("Fisher") granting Fisher the
right, co-exclusive with Matritech, to distribute the microtiter plate based
NMP22 Test Kit to hospitals and commercial laboratories within the United
States. Outside the United States, the Company sells the NMP22 Test Kit through
its European subsidiary and other distributors.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Product sales revenue increased to $446,000 from $130,000 for the quarters
ended September 30, 2000 and 1999, respectively. This increase was primarily due
to the inclusion of sales from the Company's June 28, 2000 acquisition of ADL.
Cost of sales increased to $340,000 from $148,000 for the quarters ended
September 30, 2000 and 1999, respectively. The increase in gross margin is due
to the inclusion of ADL products in the 2000 period as the ADL products carry
higher margins than the products developed and manufactured by Matritech.
Matritech product margins are negatively affected by costs related to excess
capacity maintained by the Company to support planned future sales increases.
Page 11 of 19
<PAGE> 12
Research and development expenses increased to $624,000 from $592,000 for
the quarters ended September 30, 2000 and 1999, respectively. Clinical personnel
costs decreased $20,000 due to decreased headcount while lab supplies increased
$22,000 due to the increased number of active projects. Additional various
miscellaneous increases totaling $30,000 were experienced in the 2000 period.
Selling, general and administrative expenses increased to $1,813,000 from
$919,000 for the quarters ended September 30, 2000 and 1999, respectively. This
increase is primarily due to the following: a $510,000 charge for compensation
expense related to the issuance of the public relations warrant in the third
quarter, $240,000 related to the ADL operations and increases in consulting
expenses of $244,000. These increases were offset by reductions in sales
personnel costs and sales travel expenses of $84,000 and $53,000, respectively,
due to decreased headcount in the sales department. Additional various
miscellaneous immaterial decreases totaling $37,000 were experienced in the 2000
period.
Interest and other income increased to $82,000 from $55,000 for the
quarters ended September 30, 2000 and 1999, respectively. The increase was due
to higher average cash balances available for investment resulting from funds
raised in private placements in November 1999, along with proceeds from option
and warrant exercises throughout the first quarter of 2000.
The Company incurred a net loss of $2,253,000 for the quarter ended
September 30, 2000, compared to a net loss of $1,481,000 for the quarter ended
September 30, 1999. The increase of $772,000, or 52%, in the net loss was
primarily the result of the compensation expense related to the public relations
warrant issued in July 2000 and increased administrative expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Product sales revenue increased to $776,000 from $450,000 for the nine
months ended September 30, 2000 and 1999, respectively. This increase was
primarily due to the inclusion of sales from the Company's June 28, 2000
acquisition of ADL along with an increase in sales to Europe and other
international locations of products developed and manufactured by Matritech.
This increase was offset by a decrease in sales to the United States and Japan
due to the timing of distributor inventory purchases.
Cost of sales increased to $663,000 from $479,000 for the nine months ended
September 30, 2000 and 1999, respectively. The increase in gross margin is due
to the inclusion of ADL products in the 2000 period as the ADL products carry
higher margins than the products developed and manufactured by Matritech.
Matritech product margins are negatively affected by costs related to excess
capacity maintained by the Company to support planned future sales increases.
Research and development expenses decreased to $1,695,000 from $2,037,000
for the nine months ended September 30, 2000 and 1999, respectively. This
decrease is primarily due to a $150,000 reduction in bladder clinical trial
expenses incurred in the first half of 1999 in connection with the FDA
submission and $50,000 of expense accrued in the first quarter of 1999 for
cervical clinical trials. Also, reliance on clinical consultants and clinical
travel decreased $46,000 and $43,000, respectively, due to the FDA submission,
and clinical personnel costs decreased $23,000 due to decreased headcount.
Additional various miscellaneous decreases totaling $30,000 offset these
decreases.
Selling, general and administrative expenses increased to $3,490,000 from
$2,754,000 for the nine months ended September 30, 2000 and 1999, respectively.
This increase is primarily due to the following: a $510,000 charge for
compensation expense related to the issuance of the public relations warrant in
the third quarter, $240,000 related to the ADL operations, increased consulting
expense of $228,000, increased administrative personnel costs of $188,000 due to
additional headcount, and increased annual report/proxy printing costs of
$64,000. These increases were offset by a $78,000 reduction in outside legal
costs, a $192,000 reduction in sales personnel costs and a $153,000 reduction in
sales travel expenses. Both sales reductions are due to decreased headcount in
the sales department. In addition, advertising costs decreased $107,000 due to
reduced reliance on an outside ad agency. Additional various miscellaneous
increases totaling $36,000 were experienced in the 2000 period.
Page 12 of 19
<PAGE> 13
Interest and other income increased to $271,000 from $154,000 for the nine
months ended September 30, 2000 and 1999, respectively. The increase was due to
higher average cash balances available for investment resulting from funds
raised in private placements in November 1999, along with proceeds from option
and warrant exercises during the first quarter of 2000.
The Company incurred a net loss of $4,815,000 for the nine months ended
September 30, 2000, compared to a net loss of $4,684,000 for the nine months
ended September 30, 1999. The increase of $130,000, or approximately 3%, in the
net loss was primarily due to the increased administrative expense offset by
expense reductions in sales, marketing and research and development.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private and public offerings of its securities and through funded
development and marketing agreements. At September 30, 2000 and December 31,
1999, the Company had cash and cash equivalents of $4,677,000 and $5,612,000,
respectively, and working capital of $4,285,000 and $5,341,000, respectively.
The Company's operating activities used cash of $4,150,000 and $4,474,000
for the nine months ended September 30, 2000 and 1999, respectively, primarily
to fund the Company's operating loss.
The Company's investing activities used cash of $159,000 and $27,000 in the
nine months ended September 30, 2000 and 1999, respectively, primarily for the
purchase of laboratory equipment, and in the 2000 period, for expenses incurred
in connection with the ADL purchase. The Company acquired net fixed assets of
$202,000 in the acquisition of ADL. The Company currently estimates that it will
acquire approximately $25,000 of capital equipment during the remainder of 2000,
consisting of additional laboratory and computer-related equipment.
The Company's financing activities provided cash of $3,400,000 and
$3,864,000 for the nine months ended September 30, 2000 and 1999, respectively.
The activity in the 2000 period resulted primarily from proceeds from the
exercise of common stock options and common stock purchase warrants as well as
proceeds received from the sale of common stock under the equity financing
agreement , net of equipment loan payments and the payoff of ADL's credit line.
The activity in the 1999 period was primarily from proceeds from the April 1999
private placement of common stock, net of equipment loan payments.
The Company has a term note with Phoenix Leasing Incorporated for equipment
purchases. The term note is payable over 48 months, bears interest at 11.75% and
is secured by the underlying equipment. The outstanding balance of this note at
September 30, 2000 and December 31, 1999 is $83,000 and $140,000, respectively.
In connection with the acquisition of ADL, the Company acquired long and
short term obligations. At September 30, 2000 these obligations consist of a
$131,000 loan from a bank, a $45,000 third party demand note, and $26,000 worth
of car loans. The $131,000 bank loan is due in May 2004, bears interest at 5.2%
and is secured by trade receivables and inventory. The demand note will be
repaid by the Company and the Company will be reimbursed by a key ADL employee.
The car loans bear interest between 6.99% and 7.50% and are due in monthly
installments totalling $1,048.
Page 13 of 19
<PAGE> 14
The Company's current lease on its space in Massachusetts terminates
December 31, 2000. In late June 2000, the Company signed the first amendment to
the lease agreement which extends the lease term for an additional five years,
ending December 31, 2005, and a five-year option for the period commencing
January 1, 2006. The amendment contains increases in the monthly rent amount and
the security deposit, however, the remainder of the lease terms are
substantially unchanged.
The Company expects to incur continued research and development expenses
and other costs, including costs related to clinical studies to commercialize
additional products based upon its NMP technology. The Company will require
substantial additional funds to fund operations, complete new product
development, conduct clinical trials and manufacture and market its products.
The Company's future capital requirements will depend on many factors,
including, but not limited to: continued scientific progress in its research and
development programs; the expense and size of its research and development
programs; the progress with clinical trials for its diagnostic products; the
magnitude of product sales; the time involved in obtaining regulatory approvals;
the costs involved in filing, prosecuting and enforcing patent claims; the
competing technological and market developments; and the ability of the Company
to establish additional development and marketing arrangements to provide
funding for research and development and to conduct clinical trials, obtain
regulatory approvals, and manufacture and market certain of the Company's
products.
In July 2000, the Company filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission for the issuance of up to 2.45
million shares of the Company's common stock. In August 2000, the Company signed
a common stock purchase agreement covering the sale of up to $30 million (a
maximum of 2.45 million shares) of the Company's common stock with Acqua
Wellington North American Equities Fund, Ltd. The shares may be purchased at a
small discount to the market price at any time beginning in August 2000 and
ending in October 2001. The first sale of 50,369 shares was completed in
September 2000, giving proceeds to the Company of $340,000. A prospectus
supplement was filed covering these shares.
The Company is also actively seeking additional long-term funding for its
operations from public and private sources including strategic collaborations
and partnerships. There can be no assurance, however, that capital will be
available on terms acceptable to the Company, if at all. If the Company uses
equity to finance its capital needs, such a financing could result in
significant dilution to existing stockholders. The survival of the Company in
the long term is dependent on its ability to generate revenue from sales of its
products. There can be no assurance that, in the long term, the Company will be
able to generate sufficient revenue to achieve and maintain profitability.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future financial and operational results are subject to a
number of material risks and uncertainties that may affect such results or
conditions, including:
Access to Capital. The Company needs to obtain additional long-term
financing to continue to manufacture and market its products, to conduct
research and development, and to conduct clinical trials as currently
contemplated. Although the Company has recently entered into an equity financing
agreement that should enable it to obtain additional financing over the
near-term, depending on market conditions, the
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<PAGE> 15
Company will also consider various financing alternatives, including equity or
debt financing and corporate partnering arrangements. There can be no assurance,
however, that this additional funding will be available on terms acceptable to
the Company, if at all. If additional financing is not available, the Company
may be required to further curtail expenses or take other steps that adversely
affect the Company's future performance.
History of Operating Losses and Anticipated Future Losses. The Company has
incurred operating losses since its inception and anticipates future losses.
While the Company expects to improve operating results in future periods, there
can be no assurance that the Company will achieve or maintain profitability or
that its revenue will grow in the future.
Fluctuation in Operating Results. The Company's future operating results
may vary significantly from quarter to quarter or from year to year depending on
a number of factors including: the timing and size of orders from the Company's
customers and distributors; regulatory approvals and the introduction of new
products by the Company; and the market acceptance of the Company's products.
The Company's current planned expense levels are based in part upon expectations
as to future revenue. Consequently, profits may vary significantly from quarter
to quarter or year to year based on the timing of revenue. Revenue or profits in
any period will not necessarily be indicative of results in subsequent periods.
Uncertainties Associated with Future Performance. The Company's success in
the market for diagnostic products will depend, in part, on the Company's
ability to: successfully develop, test, produce and market its products; obtain
necessary governmental approvals in a timely manner; attract and maintain key
employees; and successfully respond to technological changes in its marketplace.
The Company's success in markets outside the United States is somewhat dependent
on the performance of independent distributors over which the Company has
limited control.
Near-Term Dependence Upon A Limited Number of Products. The Company
anticipates that in the near-term the Company's success will be substantially
dependent on the success of a limited number of products. The Company would
experience a material adverse effect on its business, financial condition and
results of operations if those products do not achieve wide market acceptance.
The Company's other products have not been approved by the FDA or are in
development, and there can be no assurance that the Company will be successful
with such regulatory approvals and product development.
Reliance on Sole Suppliers. The Company currently relies on sole suppliers
for certain key components for its NMP22 Test Kit. In the event that the
components from such suppliers should become unavailable for any reason, the
Company would seek alternative sources of supply, which may entail making
regulatory submissions and obtaining regulatory approvals from the FDA or such
alternative suppliers. Although the Company attempts to maintain an adequate
level of inventory to provide for these and other contingencies, should its
manufacturing process be disrupted as a result of a shortage of key components
or a revalidation of new components, there can be no assurance that the Company
would be able to meet its commitments to customers.
Recent Acquisition. In June 2000, the Company completed the acquisition of
ADL. The Company faces challenges relating to integration of operations such as
coordinating geographically separate organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. There
can be no assurance that the acquired business or its products will be
successful, that the Company will successfully integrate the acquired business
into the Company, or that the Company will achieve the desired synergies from
the transaction.
Foreign Exchange. To the extent that foreign currency exchange rates
fluctuate in the future, the Company may be exposed to continued financial risk.
These can be no assurance that the Company will be successful in limiting its
exposure.
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<PAGE> 16
Euro Currency. On January 1, 1999 certain member countries of the European
Union (EU) established fixed conversion rates between their existing currencies
and the EU's common currency, the euro. The former currencies of the
participating countries are scheduled to remain legal tender as denominations of
the euro until January 1, 2002 when the euro will be adopted as the sole legal
currency.
The Company is currently assessing the impact that the conversion to the
euro will have on its newly acquired European operations. The Company is
evaluating the potential impact in several areas of its business including the
ability of its information systems to handle euro-denominated transactions and
the impact on exchange costs and currency exchange rate prices. The Company is
also evaluating the impact that cross-border price transparencies, which may
affect the ability to price products differently in various countries, will have
on its margin. Although the Company is still in the assessment phase, the
conversion to the euro is not expected to have a material impact on the
Company's operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio. The Company owns financial instruments that are
sensitive to market risks as part of its investment portfolio. The investment
portfolio is used to preserve the Company's capital until it is required to fund
operations including the Company's research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. The
Company does not use derivative financial instruments that meet high credit
quality standards, as specified in the Company's investment policy guidelines;
the policy also limits the amount of credit exposure to any one issue, issuer,
and type of instrument. It is suggested that this paragraph be read in
conjunction with Note 1 of Notes to Financial Statements - "Operations and
Significant Accounting Policies" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed with the SEC (File No. 0-12128).
Foreign Exchange. The accounts of the Company's foreign subsidiary are
translated in accordance with SFAS No. 52, Foreign Currency Translation. In
translating the accounts of the foreign subsidiary into U.S. dollars, assets and
liabilities are translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average exchange rate in effect
during the period. Foreign currency translation and transaction gains or losses
for the Company's subsidiary are included in the accompanying consolidated
statements of operations since the functional currency for the Company's
subsidiary is the U.S. dollar. The Company had sales of approximately $359,000
denominated in foreign currency from June 28, 2000 to September 30, 2000, the
period during which the acquisition was effective.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In July 2000, the Company completed a private placement of warrants to
purchase up to 450,000 shares of the Company's Common Stock. The
warrants issued in this transaction may be exercised at a price per
share of $2.50 at any time during the period commencing at 9:00 a.m.,
Eastern Time, on July 14, 2000 and ending at 5:00 p.m., Eastern Time,
on July 14, 2005.
In connection with the transaction, the Company agreed, at least
thirty (30) days prior to each proposed filing by the Company of a
registration statement (other than a registration statement relating
solely to securities issued pursuant to an employee benefit plan, or a
registration statement on Form F-4 or S-4), to notify the
warrantholders in writing of any such proposed filing and to include
in any such registration any shares (as defined therein) held by the
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<PAGE> 17
warrantholders which the warrantholders request to be included,
subject to the ability of the underwriters to limit the number of
shares included in the offering in view of market conditions. In
addition, the Company agreed, upon receipt of a written request (the
"Registration Request") from warrantholders holding at least 75% of
the total number of shares of Common Stock isssuable upon exercise of
the warrants (the "Warrant Shares") issued pursuant to that certain
Investor Relations Warrant Agreement dated as of July 14, 2000 (the
"Warrant Agreement"), by and between the Company and the purchasers
therein, to prepare and file, at the warrantholders' expense, a
registration statement sufficient to permit the public offering of
shares covered by the Registration Request. A registration statement
was filed on Form S-3 on August 25, 2000 covering the resale of the
Warrant Shares. Amendment No. 1 to Form S-3 was filed on September 18,
2000, and Amendment No. 2 to Form S-3 was filed on October 12, 2000.
The registration rights granted pursuant to the Warrant Agreement
terminate on July 14, 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
On September 11, 2000, the Company filed a Current Report on Form 8-K
dated as of August 24, 2000 including Items 5 and 7.
Item 5 reported the following other event: On August 24, 2000, the
Company entered into a common stock purchase agreement with Acqua
Wellington North American Equities Fund, Ltd. covering the sale of up
to $30 million or 2.45 million shares of the Company's common stock.
The shares may be purchased at a small discount to market price at any
time beginning in August 2000 and ending in October 2001.
Item 7 included the Common Stock Purchase Agreement dated August 22,
2000 by and between the Company and Acqua Wellington North American
Equities Fund, Ltd.as well as the Company's press release dated August
24, 2000.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRITECH, INC.
Date: November 8, 2000 By: /s/ Stephen D. Chubb
----------------------
Stephen D. Chubb
Director, Chairman and
Chief Executive Officer
(principal executive officer)
Date: November 8, 2000 By: /s/ John S. Doherty
---------------------
John S. Doherty
Vice President,
Chief Financial Officer and
Treasurer
(principal accounting and
financial officer)
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<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
Page 19 of 19
