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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
OR
[] 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)
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DELAWARE 04-2985132
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
330 NEVADA STREET 02460
NEWTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 928-0820
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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. [X] Yes [] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value, as of March 15, 2000, of Common Stock held by
non-affiliates of the registrant: $223,665,726 based on the last reported sale
price on the Nasdaq Stock Market.
Number of shares of Common Stock outstanding on March 15, 2000: 23,698,424
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a Definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1999. Portions of such Proxy Statement are incorporated by reference in Part III
of this report.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Matritech, Inc. (the "Company" or "Matritech") develops, manufactures and
markets innovative cancer diagnostic products based on its proprietary nuclear
matrix protein ("NMP") technology. The nuclear matrix, a three dimensional
protein framework within the nucleus of cells, plays a fundamental role in
determining cell type by physically organizing the contents of the nucleus,
including DNA. The Company has demonstrated that there are differences in the
types and amounts of NMPs found in cancerous and normal tissue and believes the
detection of such differences in NMPs provides important diagnostic information
about cellular abnormalities, including cancer. Using its proprietary NMP
technology and expertise, the Company has developed non-invasive or minimally
invasive cancer diagnostic tests for bladder and colon cancer and is developing
additional tests for cervical, breast and prostate cancer and a second
generation colon cancer test. The Company's objective is to develop tests that
will be more accurate than existing non-NMP tests and will result in lower
treatment costs and a higher standard of patient care than currently available
tests.
NMP22 Test Kit for Bladder Cancer. The Company's first product based on
its NMP technology, the NMP22(*) Test Kit for bladder cancer, was cleared for
sale in the United States by the U.S. Food and Drug Administration ("FDA") in
1996 as a prognostic indicator for the recurrence of bladder cancer. In January
2000 the FDA cleared the NMP22 Test Kit for use in testing previously
undiagnosed individuals who have symptoms of or are at risk for bladder cancer.
In August 1999 the State Drug Administration in the People's Republic of China
approved the NMP22 Test Kit for sale for the detection and management of bladder
cancer. In May 1998 the NMP22 Test Kit for bladder cancer was approved for sale
in Japan by the Japanese Ministry of Health and Welfare ("Koseisho") for use in
screening previously-undiagnosed bladder cancer patients. The NMP22 Test Kit has
been commercially available in Europe since 1995 and is currently being marketed
in Asia and in many other countries outside the United States. The Company has
retained worldwide manufacturing rights for the NMP22 Test Kit as well as
certain marketing rights in the United States. The Company has entered into an
exclusive distribution agreement for the NMP22 Test Kit for bladder cancer in
Japan with Konica Corporation ("Konica") and has additional distribution
arrangements in selected European and other countries worldwide. In March 1998
the Company and Curtin Matheson Scientific, now known as Fisher Diagnostics
("Fisher"), a division of Fisher Healthcare Company, L.L.C., entered into a
co-exclusive distribution agreement for the NMP22 Test Kit for bladder cancer in
the United States. In September 1999 the Company entered into a distribution
agreement with General Biologicals Corporation for the distribution of NMP22 in
connection with an annual screening program in Taiwan.
Test Kit for Colon Cancer. The Company has also developed a blood-based
test utilizing its NMP technology for the detection and management of colon
cancer patients. Blood specimens for use in generating clinical data for a
premarket approval submission to the FDA have been collected and the Company
believes that these specimens are sufficient to permit substantiation of a claim
for the use of its colon cancer test kit for the differential diagnosis of
individuals exhibiting symptoms such as rectal bleeding. The Company intends to
use these specimens in its current manual format test, the NuMA(TM) Test Kit, or
in validating the performance of a second generation NMP-based colon cancer test
employing other colon cancer NMPs. In either case, the Company intends to
conduct the specimen testing and the FDA submission in collaboration with an
automated instrument or clinical laboratory partner. Consequently, the timing of
an FDA submission for the Company's colon cancer test will depend upon
concluding a satisfactory agreement with such a partner, if any, and upon
completion of work necessary to design the test's automated format, as the
Company and such partner may agree. The Company has retained worldwide
manufacturing and marketing rights for its colon cancer assay.
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(*) NMP22(R) is a registered trademark and NuMA(TM), NMP-179(TM) and
Matritech(TM) are trademarks of Matritech, Inc. All other trademarks,
service marks or trade names used in this report are the property of their
respective owners.
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Cervical, Breast and Prostate Cancer Tests. The Company has also
identified NMPs specific to cervical, breast and prostate cancer and is
currently developing diagnostic tests based on its proprietary NMP technology
for these cancers. Matritech's scientists have reported the results of
pre-clinical trials of its NMP-179 Test for the identification of women with
cancer or pre-cancerous conditions of the cervix. These studies, which were
conducted in collaboration with several leading women's health centers in New
England, confirm the accuracy of the NMP-179 antibody in identifying women at
elevated risk for cervical cancer. The Company is in the process of optimizing
the format and procedures relating to the test in preparation for conducting FDA
clinical trials to obtain approval to market the test in the United States.
Matritech scientists have detected the presence of NMP's in the blood of women
with breast cancer (even at the earliest stages), which are absent in the blood
of women without breast cancer, as well as those with fibroadenoma, a benign
breast disease. In October 1999 the Company entered into a collaboration with
Johns Hopkins University School of Medicine to develop a new prostate cancer
test that has the potential to differentiate between aggressive and low-grade
disease, thereby indicating the extent of treatment necessary.
Matritech was incorporated in Delaware in October 1987. The Company's
facilities are located at 330 Nevada Street, Newton, Massachusetts 02460 and its
telephone number is (617) 928-0820.
CANCER DIAGNOSTICS MARKET
The cancer diagnostics market is composed of several overlapping
categories, each corresponding to a stage in the identification and management
of the disease. The categories are screening, diagnosing, monitoring and
evaluating prognosis. Screening tests and procedures, such as mammograms and Pap
smears, are performed regularly on individuals who may have no evidence of ill
health because the tests are effective in revealing hidden, asymptomatic
disease. Screening tests do not yield a final diagnosis. An actual diagnosis of
cancer is usually made after microscopic examination of a tissue biopsy.
Following diagnosis, additional tests can be used to monitor the course of the
disease and the patient's response to treatment. These monitoring tests may be
repeated at regular intervals, often every three months, and may be continued
for the life of an individual in order to detect the recurrence of cancer. In
addition, diagnostic tests are also used to evaluate a patient's prognosis and
to select appropriate therapy. Patients identified as having a high risk of
recurrence will be monitored more closely and may receive more aggressive
treatment. In the United States, cancer diagnostic assays have generally been
approved by the FDA for monitoring patients with known disease and only
occasionally have been approved for screening purposes.
Ideally, a cancer diagnostic assay for use in a clinical laboratory should
be both sensitive and specific. Clinical sensitivity refers to the percentage of
cases in which the assay correctly identifies the presence of disease. Clinical
specificity refers to the percentage of cases in which the assay correctly
identifies the absence of disease. Clinical sensitivity and specificity
percentages reported from studies and trials of cancer diagnostic products may
not be directly comparable, as results may be affected by
laboratory-to-laboratory differences in specimen handling, the number of
subjects studied, variability in the stages of disease present in the subject
population and the demographic composition of the subject population, among
other factors.
Accurate in vitro diagnostic assays can reduce the need for more invasive
or expensive procedures for diagnosing and managing cancer, such as surgery,
biopsy, bone scans and in vivo imaging. There are only a limited number of
FDA-approved in vitro cancer diagnostic tests currently available and the
relatively low clinical sensitivity and specificity of these tests have limited
their clinical utility. The Company believes that these tests suffer from
inherent inaccuracies because they detect substances that are only indirectly
correlated with the cancer. As a consequence of low clinical sensitivity, these
tests yield false negatives and many patients with cancer are not diagnosed
early enough to receive effective treatment, resulting in additional costs and
morbidity. Conversely, low clinical specificity yields false positives resulting
in unnecessary, expensive and painful treatment of patients without malignant
disease.
NMP TECHNOLOGY
The Company believes that its NMP technology permits the development of
cost-effective in vitro assays that are more accurate than others currently
available. The nuclear matrix, a three-dimensional protein
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framework within the nucleus of cells, helps organize active genes ("DNA") in
the nucleus. In this way, the nuclear matrix plays a fundamental role in
determining cell type and cell function. Although the specific mechanisms of
action are not yet fully understood, Matritech and independent scientists have
demonstrated that there are differences in the types and amounts of NMPs found
in cancerous and normal tissues and also among different types of normal cells.
Independent academic investigators have also confirmed the Company's findings in
papers published in scientific journals which reported NMPs specific to kidney,
prostate, breast and colon cancer tissues. Certain of these NMPs were shown to
be present in 100% of the cancer tissue specimens examined, but were absent in
all of the normal tissue specimens. The Company has examined numerous additional
cancer tissue specimens with similar results. Matritech also has demonstrated
that cell death, including cell death related to early tumor development,
results in the release of NMPs into bodily fluids. As a result, elevated levels
of certain NMPs may be found in the bodily fluids of cancer patients. The
Company is not aware of any other cancer marker, or class of markers, which
exhibit this level of clinical specificity and sensitivity.
The Company uses its proprietary technology and expertise to identify,
isolate and extract NMPs from cancerous and normal tissues. Following
extraction, the Company's scientists characterize and sequence cancer-specific
NMPs, which generally are absent, or present at low levels, in the urine, blood
and cells of healthy individuals. The Company then develops proprietary
antibodies to these NMPs and incorporates the antibodies into industry-standard
diagnostic formats, such as blood-based immunoassays.
The Company's core NMP technology is licensed from the Massachusetts
Institute of Technology ("MIT"). Under the current terms of the Company's
license from MIT, the Company's worldwide license is exclusive until the
expiration of all patent-rights in 2006. The Company has made additional
advances in NMP technology and has filed its own patent applications for related
rights protection in the United States, as well as corresponding applications
and patents in selected foreign countries. To date, Matritech has been granted
thirteen additional United States patents.
MATRITECH'S PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
NMP22 Test Kit for Bladder Cancer
In 1996, Matritech's NMP22 Test Kit for bladder cancer was cleared for sale
in the United States by the FDA as a prognostic indicator for the recurrence of
bladder cancer. The FDA's action was based upon data generated during an
extensive clinical trial of the NMP22 Test Kit involving more than 1,000
subjects at 13 sites, including bladder cancer patients, patients with other
cancers, patients with non-cancerous urinary conditions (such as urinary tract
infections) and healthy subjects. In January 2000 the FDA cleared the expanded
use of the Company's NMP22 Test Kit as an aid in identifying previously
undiagnosed individuals who have symptoms of or are at risk for bladder cancer.
In May 1998 the NMP22 Test Kit for bladder cancer was approved for sale in
Japan by Koseisho for use in screening previously undiagnosed individuals. In
August 1999 the NMP22 Test Kit was also approved for sale in the People's
Republic of China by the State Drug Administration for the detection and
management of bladder cancer. The Company is currently marketing this product in
the United States through its own sales force and a distributor and in other
major markets worldwide through distributors. Sales of the NMP22 Test Kit began
in certain countries in Europe in 1995.
The Company believes that the use of the NMP22 Test Kit for bladder cancer
enables urologists to identify and manage bladder cancer patients with less
invasive and less frequent procedures, thereby potentially reducing treatment
costs while maintaining a high standard of patient care. If a bladder cancer
patient's NMP22 value is low (less than or equal to 10 units per milliliter) 10
or more days after surgery, there is a high probability that there will be no
evidence of disease upon follow-up cystoscopic examination. Consequently, the
urologist may decide to postpone the next cystoscopy in order to reduce the
cost, anxiety and risk to the patient. Similarly, an NMP22 value greater than 10
units per milliliter indicates a higher risk that the follow-up cystoscopic
examination will indicate a recurrence of disease, enabling the urologist to
make more aggressive patient management decisions. The Company believes that
when the NMP22 Test Kit is used as part of the diagnostic work-up for bladder
disorders it gives physicians a valuable non-invasive tool to help
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them determine whether an individual's hematuria (blood in the urine) is caused
by bladder cancer or by a non-life-threatening condition. The Company believes
that the NMP22 Test Kit has the potential to make a positive impact on the
accurate and cost-effective detection and management of bladder cancer.
The Company has entered into distribution arrangements in the United States
and selected European and other countries for the NMP22 Test Kit. In 1994 the
Company entered into a distribution agreement with Konica. The Konica agreement
granted exclusive distribution rights in Japan for the NMP22 Test Kit in
exchange for $325,000 in licensing fees. Under the terms of its agreement with
Konica, Matritech sells NMP22 Test Kits to Konica for resale in Japan at prices
based on Japanese reimbursement rates. Konica has limited manufacturing rights
if the Company fails to deliver required quantities of test kits. In March 1998
the Company entered into a distribution agreement with Fisher. Pursuant to this
agreement, the Company retained its right to distribute the NMP22 Test Kit in
the United States through its own sales force but granted Fisher an otherwise
exclusive right to distribute the NMP22 Test Kit to hospitals and commercial
laboratories within the United States. In September 1999 the Company entered
into a distribution agreement with General Biologicals Corporation for the
distribution of NMP22 in Taiwan as a part of an annual screening program for
bladder cancer. The Company has retained worldwide manufacturing rights for the
NMP22 Test Kit for bladder cancer.
Cervical Cancer Product (NMP-179)
Matritech's scientists have reported the results of pre-clinical trials of
its NMP-179 Test for the identification of women with cancer or pre-cancerous
conditions of the cervix. These studies, which were conducted in collaboration
with several leading women's health centers in New England, confirm the efficacy
of the NMP-179 antibody in identifying women at elevated risk for cervical
cancer. The Company is in the process of optimizing the format and procedures
relating to the test in preparation for conducting FDA clinical trials to obtain
approval to market the test in the United States. Matritech has maintained its
worldwide manufacturing and marketing rights to its cervical cancer product.
Breast Cancer Product (NMP66)
During 1998 Matritech scientists, using a mass spectrometer instrument,
demonstrated the ability to detect certain breast cancer markers in the blood of
cancer patients which were not present in the blood of normal individuals. In
September 1999 the Company announced the results of its analysis of blood
specimens from 20 women with breast cancer and 20 women thought to be free of
the disease. Matritech scientists found specific proteins in the blood of all 20
breast cancer patients and by contrast, found no evidence of such proteins in
any of the specimens from patients without breast cancer. In March 2000 the
Company announced that its scientists detected the presence of NMP's in the
blood of women with breast cancer (even at the earliest stages) but which are
absent in the blood of women without breast cancer as well as those with
fibroadenoma, a benign breast disease. The Company intends to conduct clinical
trials to generate data required to apply for FDA approval of tests using these
breast cancer markers. Matritech believes that the distinctive NMPs found in
breast cancer cells and the Company's ability to detect these NMPs in blood may
enable it to develop a breast cancer blood-based assay more accurate than
products presently available. The Company has retained worldwide manufacturing
and marketing rights for its breast cancer product under development.
Prostate Cancer Product (NMP45)
In October 1999 the Company entered into a collaboration with Alan Partin,
M.D., Ph.D. of the Johns Hopkins University School of Medicine to develop a new
prostate cancer test that the Company believes has the potential to
differentiate between aggressive and low-grade forms of prostate cancer, thereby
indicating the extent of treatment necessary. The test will measure the amount
of NMP45 (also known as YL-1), a nuclear matrix protein, in a prostate cancer
patient's biopsy. High levels of this protein have been found in the prostate
cancer tissue of patients with aggressive forms of prostate cancer. A
preliminary study by investigators of the Johns Hopkins School of Medicine found
that the level of NMP45 is elevated in the majority of life-
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threatening aggressive tumors and is not found in normal prostate tissue and
absent or present at lower levels in indolent forms of prostate cancer, which is
believed to be non life-threatening.
Test Kit for Colon Cancer (NMP32)
The Company has also developed a blood-based test utilizing its NMP
technology for the detection and management of colon cancer patients. Blood
specimens for use in generating clinical data for a premarket approval
submission to the FDA have been collected and the Company believes that these
specimens are sufficient to substantiate a claim for the use of its colon cancer
test kit for the differential diagnosis of individuals exhibiting symptoms such
as rectal bleeding. The Company intends to use these specimens in conjunction
with its current manual format test, the NuMA Test Kit, or in validating the
performance of a second generation NMP-based colon cancer test employing other
colon cancer NMPs. In either case, the Company intends to conduct the specimen
testing and FDA submission in collaboration with an automated instrument partner
or clinical laboratory. Consequently, the timing of an FDA submission for the
Company's colon cancer test will depend upon concluding a satisfactory agreement
with such a partner, if any, and upon completion of work necessary to design the
test's automated format, as the Company and such partner agree. The Company has
retained worldwide manufacturing and marketing rights for its colon cancer test.
The Company is seeking distributors and an automated instrument partner for this
test.
MARKETING AND SALES
The Company has retained rights to sell all of its products in the United
States. Matritech is selling its NMP22 Test Kit for bladder cancer in the United
States to clinical laboratories using its own direct sales force, and in March
1998 entered into a distribution agreement with Fisher granting Fisher the
co-exclusive right with Matritech to distribute the NMP22 Test Kit to hospitals
and commercial laboratories within the United States. The Company currently has
three full-time sales representatives. Outside the United States, the Company
sells the NMP22 Test Kit through distributors.
During the year ended December 31, 1999 the Company received approximately
30% and 49% of its revenue from Konica and Fisher, respectively. During the year
ended December 31, 1998, the Company received approximately 29% and 31% of its
revenue from Wallac ADL and Fisher, respectively.
During the years ended December 31, 1997, 1998 and 1999, 42%, 52% and 53%,
respectively, of the Company's total product sales were from the United States
and 58%, 48% and 47%, respectively, were from foreign countries. Product sales
revenue generated outside the United States during the years ended December 31,
1997 and 1998 was primarily from Europe. For the year ended December 31, 1999,
product sales revenue generated outside of the United States was primarily from
Asia. See Note 9 of Notes to Financial Statements -- "Segment and Geographic
Information."
THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products will
depend in part on the extent to which reimbursement for the cost of such
products will be available from government health administration authorities,
private health insurers and other third-party payors. The Company believes that
FDA clearance of a diagnostic product facilitates third-party reimbursement, but
there can be no assurance that reimbursement will be available for such products
or, if available, that it will be adequate.
In the case of private insurance, the reimbursement of any medical device,
whether approved, or for investigational use only or for research use, is at the
sole discretion of the patient's individual carrier. The decision to reimburse
can be made on a case-by-case basis (as is done for research therapies) or on a
system-wide basis (such as screening mammography). Historically, the decision to
reimburse for a new medical procedure is made by the carrier's medical director
or review committee. This group will base their reimbursement decision on
published clinical data and information by treating physicians. Even if a
procedure has been approved for reimbursement, there are no assurances that the
insurance carrier will continue to reimburse the procedure.
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Health care reform is an area of continuing national attention and a
priority of many governmental officials. Certain reform proposals, if adopted,
could impose limitations on the prices the Company will be able to charge in the
United States for its products or the amount of reimbursement available for the
Company's products from governmental agencies or third-party payors.
MANUFACTURING AND FACILITIES
The Company currently assembles its test kits in a portion of its 22,500
square-foot facility in Newton, Massachusetts and relies on subcontractors for
certain components and processes. The Company's lease is for a term of five
years and expires on December 31, 2000. The annual base rent for each year of
the term is $230,625. The Company is actively seeking replacement facilities of
approximately equal size to its present facility. The Company has retained all
manufacturing rights for its products and products under development, except for
certain rights that could be granted to the Company's NMP22 Test Kit
distribution partner in Japan if the Company fails to perform under its
agreement with such distributor.
The Company currently relies on sole suppliers for certain key components
for its NMP22 Test Kit for bladder cancer. 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. The Company is also subject to the FDA's Good
Manufacturing Practice ("GMP") requirements. See "-- Government Regulation."
COMPETITION
Matritech is not aware of any other company using NMP technology to develop
diagnostic or therapeutic products. However, competition in the development and
marketing of cancer diagnostics and therapeutics, using a variety of
technologies, is intense.
There are many pharmaceutical companies, biotechnology companies, public
and private universities and research organizations actively engaged in the
research and development of clinical cancer diagnostic products. Many of these
organizations have financial, manufacturing, marketing and human resources
greater than those of the Company. Matritech expects that its diagnostic
products will compete largely on the basis of clinical utility, accuracy
(sensitivity and specificity), ease of use and other performance
characteristics, price, patent position, as well as on the effectiveness of the
Company and its marketing partners.
The Company expects that certain of its assays will compete with existing
FDA-approved assays, including BTA, which is used for monitoring bladder cancer,
CEA, which is used primarily for monitoring colorectal and breast cancers, PSA
and PSA related markers, which are used primarily for monitoring and screening
prostate cancer, and TRUQUANT BR RIA, which is used for monitoring breast
cancer. Matritech is also aware of a number of companies exploring the
application of oncogene technology to cancer diagnostics.
A number of companies are attempting to develop automated instruments for
Pap smear analysis that would compete with the NMP-179 cervical cancer product
developed by the Company. These companies are computerizing image analysis
techniques to automate much of the work currently done by cytotechnologists. To
date, several of these instruments have been approved by the FDA for rescreening
Pap smear slides previously identified by a cytotechnologist as normal as well
as the primary screening of cervical specimens.
Recently, the FDA cleared a cervical diagnostic product, HPV, for use in
detecting the viral infection believed to cause cervical cancer. Although many
women, especially those under 35 years of age, are infected with this virus and
thus positive for HPV, most would not progress to cervical cancer. Nevertheless,
the HPV test may be selected by some gynecologists and clinical pathologists to
identify women at high risk of infection.
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The Company's products will also compete with more invasive or expensive
procedures such as surgery, bone scans, magnetic resonance imaging ("MRI") and
other in vivo imaging techniques. Matritech believes that its products, if
successfully commercialized, improve patient management and lower overall costs,
by providing accurate information and, in some cases, by providing an
alternative to these invasive or costly procedures.
Should the Company decide to develop and seek to market therapeutic
products, competition will be based, among other things, on product efficacy,
safety, reliability, price and patent position as well as the state of the
industry and effectiveness of the Company, future marketing partners and
competitors.
In addition, there can be no assurance that competing diagnostic and
therapeutic products based on other technologies will not be introduced by other
companies and adversely affect the competitive position of the Company.
PATENTS, LICENSES AND TRADE SECRETS
Matritech's diagnostic technology is protected by three United States
patents owned by MIT and expiring in 2006, with corresponding foreign patents
granted and/or patent applications pending in Canada and selected countries in
Europe and Asia. One of the three United States patents was granted following a
reissue proceeding before the United States Patent and Trademark Office. The NMP
technology owned by MIT is licensed to Matritech worldwide in exchange for
royalties payable until the expiration of underlying patent rights. MIT has
licensed its patent rights to Matritech on an exclusive basis through 2006.
The protection offered by these patents extends to the detection and
measurement of NMPs, or associated nucleic acids, using antibody or gene probe
formats, as well as to certain assay methods exploiting NMPs. With regard to
related NMP advances, Matritech has filed additional United States patent
applications and, in certain circumstances, foreign counterparts in one or more
countries including Australia, Canada and selected countries in Europe and Asia.
The Company currently has thirteen additional United States patents and six
applications on file in the United States on these disclosures. Certain United
States patents provide additional protection for Matritech's NMP22 Test Kit for
bladder cancer until 2015. The Company intends to file additional patent
applications in the future. The Company believes that any patents that may issue
from its applications will provide competitive protection for its products after
expiration of its license from MIT. The Company also intends to rely on its
unpatented proprietary information to maintain and develop its commercial
position.
GOVERNMENT REGULATION
Diagnostic Products
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA, and, in some instances, by foreign
governments. Pursuant to the Federal Food, Drug and Cosmetic Act of 1976, as
amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA
regulates the clinical testing, manufacturing, labeling, distribution, and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
In the United States, medical devices and diagnostics are classified into
one of three classes (class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness. Under
FDA regulations, class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMPs) and class II devices are
subject to general and special controls (for example, performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
class III devices are those which must receive premarket approval ("PMA") by the
FDA to
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ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through the filing of either a 510(k)
notification or a PMA. A 510(k) clearance will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed class I or II medical device, or to a class III medical
device for which the FDA has not called for a PMA. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, or
that additional information or data is needed before a substantial equivalence
determination can be made. A request for additional data may require that
clinical studies of the safety and efficacy of the device be performed.
Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. It generally takes from four
to twelve months from submission to obtain a 510(k) clearance, but may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes clinical trial
data to demonstrate safety and the effectiveness of the device. The PMA
application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device, as well as proposed labeling.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. An FDA review of a PMA application generally takes one to two years
from the date the PMA application is accepted for filing, but may take
significantly longer. The review time is often significantly extended as a
result of the FDA requiring more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, typically a panel of clinicians and/or other appropriate experts in
the relevant fields, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
committee but generally follows them. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions which must be
met in order to secure final approval for sale of the device. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA approval letter, authorizing commercial marketing of the device for
certain indications. If the FDA's evaluations of the PMA application or
manufacturing facilities are not favorable, the FDA will deny approval of the
PMA application or issue a "not approvable letter." The FDA may also determine
that additional clinical trials are necessary, in which case a PMA may be
substantially delayed while additional clinical trials are conducted and
submitted in an amendment to the PMA. The PMA process can be expensive,
uncertain and lengthy and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
Once a device has successfully completed the PMA process, modifications to
the device, its labeling, or manufacturing process may require approval by the
FDA of PMA supplements or new PMAs. Supplements to a PMA often require the
submission of the same type of information required for an initial PMA, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA.
8
<PAGE> 10
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including FDA approval of investigations, provided the testing is non-invasive,
does not require an invasive sampling procedure that presents significant risk,
does not introduce energy into a subject, and the tests are not used as a
diagnostic procedure without confirmation of the diagnosis by another medically
established diagnostic product or procedure. IVD manufacturers must also
establish distribution controls to assure that IVDs distributed for the purposes
of conducting clinical investigations are used only for that purpose. Pursuant
to current FDA policy, manufacturers of IVDs labeled for investigational use
only ("IUO") or research use only ("RUO") are encouraged by the FDA to establish
a certification program under which investigational IVDs are distributed to or
utilized only by individuals, laboratories, or health care facilities that have
provided the manufacturer with a written certification of compliance indicating
that (1) the device will be used for investigational or research purposes only,
and (2) results will not be used for diagnostic purposes without confirmation of
the diagnosis under another medically established diagnostic device or
procedure. In addition, the certification program requirements for IUO products
should include assurances that all investigations or studies will be conducted
with approval from an institutional review board ("IRB"), using an IRB-approved
study protocol and patient informed consent and that the device will be labeled
in accordance with the applicable labeling regulations. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling.
In 1996 the FDA cleared Matritech's NMP22 Test Kit for bladder cancer for
sale in the United States as a prognostic indicator for bladder cancer (i.e., as
a predictor of bladder cancer recurrence following therapy, such as surgical
excision of cancerous tissue). In January 2000 the FDA cleared the expanded use
of the Company's NMP22 Test Kit for the additional use of testing previously
undiagnosed individuals who have symptoms of or are at risk for bladder cancer.
In connection with Matritech's colon cancer program, blood specimens for
use in generating clinical data for a PMA submission to the FDA have been
collected and the Company believes that these specimens are sufficient to
substantiate the use of Matritech's colon cancer test for the differential
diagnosis of individuals exhibiting symptoms such as rectal bleeding. The
Company intends to use these specimens in conjunction with its current manual
format test, the NuMA Test Kit, or in validating the performance of a second
generation NMP-based colon cancer test employing other colon cancer NMPs. In
either case, the Company intends to conduct the specimen testing and FDA
submission in collaboration with an automated instrument partner or clinical
laboratory. Consequently, the timing of an FDA submission for the Company's
colon cancer test will depend upon concluding a satisfactory agreement with such
a partner and the completion of work necessary to design the test's automated
format, as the Company and such partner may agree.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA, and are
subject to periodic inspections by the FDA and certain state agencies. The FDC
Act requires devices to be manufactured in accordance with GMP regulations which
impose certain procedural and documentation requirements upon the Company with
respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting the promotion of devices for unapproved uses and the
promotion of devices for which premarket clearance or approval has not been
obtained. Consequently, in the United States the Company cannot promote the
NMP22 Test Kit for any unapproved use. Failure to comply with these requirements
can result in regulatory enforcement action by the FDA that would adversely
affect the Company's ability to conduct testing necessary to obtain market
clearance for these products and, consequently, could have a material adverse
effect on the Company's business, financial condition and results of operations.
9
<PAGE> 11
The Company and its products are also subject to a variety of state laws
and regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control, and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
Foreign Sales
Export of unapproved products subject to the PMA requirements must be
approved in advance by the FDA for export unless they are approved for use by
the regulatory authorities in any member state of the European Union and certain
other countries, in which case they may be exported to any such country without
FDA approval. To obtain FDA export approval, when it is required, certain
requirements must be met and information must be provided to the FDA, including,
with some exceptions, documentation demonstrating that the product is approved
for import into a country to which it is to be exported and safety data from
animal or human studies. There can be no assurance that FDA will grant export
approval when such approval is necessary, or that the countries to which the
devices are to be exported will approve the devices for import. Failure on the
part of the Company to obtain export approvals, when required, could
significantly delay and impair the Company's ability to continue exports of its
devices and could have a material adverse effect on the Company's business,
financial condition or results of operations.
The introduction of the Company's developmental-stage test products in
foreign markets will also subject the Company to foreign regulatory clearances
which may impose additional substantial costs and burdens. International sales
of medical devices are subject to the regulatory requirements of each country.
The regulatory review process varies from country to country. Many countries
also impose product standards, packaging requirements, labeling requirements and
import restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements. In Germany, where the Company began
selling its NMP22 Test Kit for bladder cancer in 1995, no regulatory approval
comparable to the United States PMA is required prior to public sale of
diagnostic products. In May 1998 the Koseisho approved the NMP22 Test Kit for
sale in Japan for use in screening previously undiagnosed patients. In August
1999 the State Drug Administration in the People's Republic of China approved
the NMP22 Test Kit for sale in the People's Republic of China for the detection
and management of bladder cancer.
The approval by the FDA and foreign government authorities is unpredictable
and uncertain and no assurance can be given that the necessary approvals or
clearances will be granted on a timely basis or at all. Delays in receipt of, or
a failure to receive, such approvals or clearances, or the loss of any
previously received approvals or clearances, could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition or results of operations.
CLIA
Pursuant to the Clinical Laboratory Improvement Amendments ("CLIA"), the
FDA will assign a complexity category to each new in vitro diagnostic test. This
category will determine the rigor of quality control that must be followed by
purchasers and users of the device and, thus, can affect purchasing decisions of
laboratories and hospitals. In addition, as part of the premarket review
process, manufacturers must establish that the device's quality control
instructions are commensurate with CLIA quality control
10
<PAGE> 12
requirements for that device. The review period for in vitro diagnostic tests
may be extended due to these new CLIA requirements.
Other
In order for the Company to conduct preliminary studies or clinical trials
at a hospital or other health care facility, the Company's research
collaborators must first obtain approval from the IRB of the hospital or health
care facility. In each case, a written protocol must be submitted to the IRB
describing the study or trial, which is reviewed by the IRB with a view to
protecting the safety and privacy of the institution's patients.
In addition to the regulatory framework for clinical trials and product
approvals, the Company is subject to regulation under federal, state and local
law, including requirements regarding occupational safety, laboratory practices,
environmental protection and hazardous substance control, and may be subject to
other present and possible future local, state, federal and foreign regulation.
EMPLOYEES
As of March 15, 2000, the Company had 35 full-time employees, 15 of whom
were engaged in research and development. The Company's future success depends
in part on its ability to recruit and retain talented and trained scientific,
technical, marketing and business personnel. The Company has been successful to
date in hiring and retaining such personnel, but there can be no assurance that
such success will continue. None of the Company's employees is represented by a
labor union, and the Company considers its relations with its employees to be
excellent.
RESEARCH AND DEVELOPMENT
Matritech's future success will depend in large part on its ability to
develop and bring to market new products based on its proprietary NMP
technology. Accordingly, Matritech devotes substantial resources to research and
development. The Company has assembled a scientific staff with a variety of
complementary skills in several advanced research disciplines, including
molecular biology, immunology and protein chemistry. In addition, Matritech
maintains consulting and advisory relationships with a number of prominent
researchers.
During 1997, 1998 and 1999 Matritech spent approximately $3.9 million, $4.0
million and $3.1 million, respectively, on research and development.
Substantially all of these expenditures were related to the development of
diagnostic products.
ITEM 2. PROPERTIES.
The Company's facilities are located in Newton, Massachusetts, where the
Company leases corporate headquarters, research and development and
manufacturing facilities which occupy approximately 22,500 square feet. The
Company's lease is for a term of five (5) years and expires on or about December
31, 2000. The annual base rent for each year of the term is $230,625. The
Company is actively seeking replacement facilities of approximately equal size
to its present facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any material pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on The Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq National Market") under the symbol: "NMPS." The
following table sets forth the range of quarterly high and low sales price
information for the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998
First Quarter............................................. $6 $ 3 3/8
Second Quarter............................................ 5 1/8 1 25/32
Third Quarter............................................. 2 15/16 29/32
Fourth Quarter............................................ 3 5/8
FISCAL 1999
First Quarter............................................. $2 15/32 $ 1 5/32
Second Quarter............................................ 1 1/8 1 11/16
Third Quarter............................................. 1/2 4 13/16
Fourth Quarter............................................ 1 7/8 5 9/16
</TABLE>
As of March 15, 2000, there were approximately 360 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings to finance future growth and therefore
does not anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1999, the Company issued the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):
(a) Issuances of Capital Stock and Warrants
In April 1999 the Company issued and sold 3,094,965 shares of Common Stock
for an aggregate selling price of approximately $4,000,000. The Company received
net proceeds of approximately $3,910,000 after deducting the fees and expenses
of the transaction.
In November 1999 the Company issued and sold 900,670 units, with each unit
consisting of two shares of Common Stock and a warrant to purchase one share of
Common Stock for an aggregate selling price of $3,602,680. The Company received
net proceeds of approximately $3,546,000 after deducting the fees and expenses
of the transaction. The warrants issued in this transaction may be exercised at
a price of $2.20 per share.
(b) Grants and Exercises of Stock Options
From January 1, 1999 through December 31, 1999, the Company granted options
to purchase an aggregate of 472,670 shares of Common Stock at exercise prices
ranging from $.84 to $3.69, to its employees and directors under the Company's
1992 Stock Plan, as amended and the Company's Amended and Restated 1992
Non-Employee Director Stock Plan. None of these options were exercised as of
December 31, 1999.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act or as a transaction pursuant to a compensatory
benefit plan. All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for each year in the five-year
period ended December 31, 1999 have been derived from the Company's financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. This data should be read in conjunction with the financial
statements, related notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Collaborative research and
development, license fees and
product sales.................... $ 1,023,438 $ 1,881,833 $ 747,532 $ 967,759 $ 622,808
Interest and other income.......... 216,865 528,583 566,686 457,678 224,658
------------ ------------ ------------ ------------ ------------
Total revenue............... 1,240,303 2,410,416 1,314,218 1,425,437 847,466
Expenses:
Research & development............. 3,014,125 3,909,793 3,943,390 4,010,368 3,146,805
Selling, general &
administrative................... 2,308,773 3,665,298 4,845,915 4,950,593 3,824,877
------------ ------------ ------------ ------------ ------------
Total expenses.............. 5,322,898 7,575,091 8,789,305 8,960,961 6,971,682
------------ ------------ ------------ ------------ ------------
Net loss............................. $ (4,082,595) $ (5,164,675) $ (7,475,087) $ (7,535,524) $ (6,124,216)
============ ============ ============ ============ ============
Basic and diluted net loss per common
share(1)........................... $ (.38) $ (.32) $ (.43) $ (.40) $ (.29)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding(1).............. 10,733,769 15,900,467 17,512,242 18,608,784 21,126,422
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 11,009,310 $ 6,770,336 $ 11,067,414 $ 4,146,821 $ 5,612,194
Working capital...................... 10,838,756 7,165,462 10,989,534 3,787,709 5,341,336
Total assets......................... 11,959,203 8,669,861 12,691,773 5,511,825 6,902,575
Accumulated deficit.................. (20,975,730) (26,140,405) (33,615,492) (41,151,016) (47,275,232)
Total stockholders' equity........... $ 11,351,178 $ 7,783,984 $ 11,688,674 $ 4,399,981 $ 5,943,460
</TABLE>
- ---------------
(1) Basic and diluted loss per share are the same for all periods presented. See
Note 1 of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Annual Report, 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 revenues, operating income, EBITDA
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.
OVERVIEW
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
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<PAGE> 15
expects to incur significant operating losses for at least the next several
years. For the period from inception to December 31, 1999, the Company incurred
a cumulative net loss of approximately $47.3 million.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Product sales and collaborative research and development revenue decreased
to $623,000 for the year ended December 31, 1999 from $968,000 for the year
ended December 31, 1998. Revenue from product sales decreased to $623,000 for
the year ended December 31, 1999 from $895,000 for the year ended December 31,
1998 due primarily to domestic and European distributor inventory balances being
built up in 1998 (eliminating the need for additional shipments in 1999) and the
timing of domestic distributor inventory purchases. Both of these factors led to
a decrease in the number of units sold to distributors in 1999. The decrease is
also due to a lesser extent to a lower average unit sales price in 1999. The
emergence of product sales arising from new partner-based distribution in Japan
in 1999 helped to offset the reduction. In addition, collaborative research and
development revenue decreased $73,000 as the SBIR funding for the Company's NuMA
tumor marker project was fulfilled in 1998. There was no SBIR funding in 1999.
Interest and other income was $225,000 for the year ended December 31, 1999
and $458,000 for the year ended December 31, 1998. The decrease was due to lower
average cash balances available for investment in 1999 as compared to 1998.
Research and development expenses decreased to $3,147,000 for the year
ended December 31, 1999 from $4,010,000 for 1998. The decrease was primarily due
to a $454,000 reduction derived through decreased headcount and a related
$167,000 reduction in supplies usage under cost-reduction programs and a
decision to focus resources to selected projects.
Selling, general and administrative expenses decreased to $3,825,000 for
the year ended December 31, 1999 from $4,951,000 for the year ended December 31,
1998. The decrease was primarily due to a $333,000 reduction in promotional
materials in 1998 not incurred in 1999, a $246,000 reduction derived through
decreased headcount under cost-reduction programs, and a $70,000 reduction in
outside marketing and administrative consultants.
The Company incurred a net loss of $6,124,000 for the year ended December
31, 1999 as compared with a net loss of $7,536,000 for the year ended December
31, 1998. The decreased loss was primarily due to the savings in both research
and development and selling, general and administrative expenses partially
offset by the decreased revenue.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Product sales, collaborative research and development revenue and license
fees increased to $968,000 for the year ended December 31, 1998 from $748,000
for the year ended December 31, 1997. Revenue from product sales increased to
$895,000 for the year ended December 31, 1998 from $602,000 for the year ended
December 31, 1997 due primarily to increased sales of the NMP22 Test Kit for
bladder cancer in the United States and Europe. Product revenue may fluctuate
from quarter to quarter and from year to year based on the timing of
distributors' orders for the NMP22 Test Kits for bladder cancer. Matritech also
received $73,000 in SBIR funding during the year ended December 31, 1998 for its
NuMA Tumor Marker project and $6,000 in SBIR funding for its cancer therapy
development project during the year ended December 31, 1997. In addition,
Matritech recorded $140,000 in revenue from collaborative research and
development for the year ended December 31, 1997, consisting of a milestone
payment associated with a development agreement with Bayer Corporation.
Interest and other income was $458,000 for the year ended December 31, 1998
and $567,000 for the year ended December 31, 1997. The decrease was due to lower
average cash balances available for investment in 1998 as compared to 1997.
14
<PAGE> 16
Research and development expenses increased slightly to $4,010,000 for the
year ended December 31, 1998 from $3,943,000 for 1997. The increase was
primarily due to increased staffing of clinical affairs personnel to manage the
Company's colon cancer FDA submission and the NMP22 screening trial and related
site management costs.
Selling, general and administrative expenses increased to $4,951,000 for
the year ended December 31, 1998 from $4,846,000 for the year ended December 31,
1997. The increase was due to the augmentation of the sales force for the NMP22
Test Kit for bladder cancer and increased public relations and media relations
consulting fees. In April 1997 the Company issued a warrant to a public
relations consultant. The Company expensed the value of the warrant, $500,000,
ratably over the one year term of its agreement with such consultant. The
Company expensed $150,000 and $350,000 of the value of this warrant during the
years ended December 31, 1998 and 1997, respectively.
The Company incurred a net loss of $7,536,000 for the year ended December
31, 1998 as compared with a net loss of $7,475,000 for the year ended December
31, 1997. The increased loss resulted primarily from increased sales and
marketing expenses for the NMP22 Test Kit, consulting fees, and to a lesser
extent, increased clinical affairs costs associated with the colon cancer
project.
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 December 31, 1999, the Company had cash
and cash equivalents of $5,612,000 and working capital of $5,341,000. The
Company's primary cash infusion in 1999 was from private sales of common stock
in April 1999 and private sales of common stock and warrants to purchase common
stock in November 1999 which totaled $7,456,000.
The Company's operating activities used cash of approximately $5,941,000,
$6,901,000 and $6,486,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, primarily to fund the Company's operating loss.
The Company's investing activities used cash of approximately $34,000,
$56,000 and $516,000 in the years ended December 31, 1999, 1998 and 1997,
respectively, primarily for property and equipment and certain intangible
assets. The Company currently estimates that capital expenditures during the
year ending December 31, 2000 will not be significant.
Financing activities provided cash of approximately $7,440,000, $36,000 and
$11,299,000 in the years ended December 31, 1999, 1998 and 1997, respectively,
primarily from the sale of equity securities, the exercise of stock options and
warrants and proceeds from a capital equipment loan in 1997, net of payments on
the note payable.
In 1997 the Company entered into an equipment line of credit with Phoenix
Leasing, Incorporated under which it could borrow up to $1,200,000 for equipment
purchases. The equipment line of credit expired and was converted into a term
note on October 20, 1997 totaling $286,000. The term note is payable over 48
months and is secured by the underlying equipment. The term note bears interest
at 11.75% and has an outstanding balance of $140,432 at December 31, 1999.
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 magnitude of its research and development programs;
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; 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
15
<PAGE> 17
conduct clinical trials, obtain regulatory approvals, and manufacture and market
certain of the Company's products.
The Company is also actively seeking additional long-term funding 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.
As of December 31, 1999, the Company had $5,612,000 in cash and cash
equivalents and $5,341,000 of working capital. The Company believes that its
existing cash resources, expected cash flow from operating activities and the
proceeds from the 1999 private placements will satisfy its capital needs through
2000.
To date, the Company has not experienced any Year 2000 problems including
any problems related to its material supply and service vendors. Nevertheless,
there can be no assurances that the Company will not experience problems
resulting from any of the foregoing which could have a material adverse impact
on its business, operating results and financial condition. The Company will
continue to monitor all software and operating systems for compliance. At
December 31, 1999 the Company has accrued $14,000 in the event any Year 2000
non-compliance should arise.
The foregoing discussion includes forward-looking statements that are
subject to risks and uncertainties and actual results may differ materially from
those currently anticipated depending on a variety of factors including those
discussed below. See "Factors That May Affect Future Results." 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 market its NMP22 Test Kit for bladder cancer, to
conduct research and development, to conduct clinical trials and to manufacture
and market its products as currently contemplated. The Company will consider
various financing alternatives, including equity or debt financings and
corporate partnering arrangements. There can be no assurance, however, that this
financing 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 does not expect to be
profitable within the next several years. 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
16
<PAGE> 18
outside the United States is dependent on the performance of independent
distributors over which the Company has limited control.
Near-Term Dependence Upon NMP22. The Company anticipates that in the
near-term it will be substantially dependent on the success of the NMP22 Test
Kit for bladder cancer, which was approved for sale in the United States by the
FDA in 1996 and in Japan by the Koseisho in 1998 and in the People's Republic of
China by the State Drug Administration in 1999. The Company expects to generate
substantially all of its near-term product sales from the sale of NMP22 Test
Kits. The Company would experience a material adverse effect on its business,
financial condition and results of operations if the NMP22 Test Kit does not
achieve wide market acceptance. The remainder of the Company's products have not
been approved by the FDA or are in development and there can be no assurance
that it 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Investment Portfolio. 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. See Note 1 of
Notes to Financial Statements -- "Operations and Significant Accounting
Policies."
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial
statements set forth in Item 14(a) under the caption "Financial Statements" as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
17
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information concerning directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's fiscal year ended December 31,
1999 under the headings "Occupations of Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's fiscal year ended December 31,
1999 under the headings "Occupations of Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1999, under the heading
"Compensation and Other Information Concerning Directors and Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1999, under the heading "Securities
Ownership of Management and Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information, if any, required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission within 120 days after the close of the
Company's fiscal year ended December 31, 1999, under the heading "Certain
Relationships and Related Transactions."
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
Report of Independent Public Accountants.
Balance Sheets as of December 31, 1998 and 1999.
Statements of Operations for the Years ended December 31, 1997, 1998
and 1999.
Statements of Stockholders' Equity (Deficit) for the Years ended
December 31, 1997, 1998 and 1999.
Statements of Cash Flows for the Years ended December 31, 1997, 1998
and 1999.
Notes to Financial Statements.
2. No schedules are submitted because they are not applicable, not required
or because the information is included in the Financial Statements or Notes to
Financial Statements.
3. List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibits 3, 4.1 to the Company's
Registration Statement No. 33-46158 on Form S-1 and
incorporated herein by reference).
3.2 Amended and Restated By-Laws of the Registrant (filed as
Exhibits 3.2, 4.1 to the Company's Registration Statement
No. 33-46158 on Form S-1 and incorporated herein by
reference).
3.3 Certificate of Amendment dated June 16, 1994, of Amended and
Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.2 of the Company's Quarterly Report on
Form 10-Q for the fiscal Quarter ended June 30, 1995 and
incorporated herein by reference).
3.4 Certificate of Amendment dated June 5, 1995, of Amended and
Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.3 of the Company's Quarterly Report on
Form 10-Q for the fiscal Quarter ended June 30, 1995 and
incorporated herein by reference).
4.1 Description of Capital Stock contained in the Registrant's
Amended and Restated Certificate of Incorporation, filed as
Exhibits 3.1, 3.3 and 3.4.
10.1* License Agreement between Matritech and the Massachusetts
Institute of Technology dated December 14, 1987, as amended
March 15, 1988, December 20, 1989 and March 4, 1992 (filed
as Exhibit 10.1 to the Company's Registration Statement No.
33-46158 on Form S-1 and incorporated herein by reference).
10.2# 1988 Stock Plan (filed as Exhibit 10.8 to the Company's
Registration Statement No. 33-46158 on Form S-1 and
incorporated herein by reference).
10.3# 1992 Stock Plan as amended as of June 13, 1997 (filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.4# Amended and Restated 1992 Non-Employee Director Stock Plan
as amended as of June 7, 1996 (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 and incorporated herein by
reference).
10.5# 1992 Employee Stock Purchase Plan (filed as Exhibit 10.11 to
the Company's Registration Statement No. 33-46158 on Form
S-1 and incorporated herein by reference).
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.6 Second Amended and Restated Registration Rights Agreement
dated May 4, 1990, as amended February 26, 1992 (filed as
Exhibit 10.13 to the Company's Registration Statement No.
33-46158 on Form S-1 and incorporated herein by reference).
10.7 Form of Indemnity Agreement with directors (filed as Exhibit
10.14 to the Company's Registration Statement No. 33-46158
on Form S-1 and incorporated herein by reference).
10.8 Fourth Amendment dated March 18, 1993 to License Agreement
between the Company and the Massachusetts Institute of
Technology dated December 14, 1987, as amended (filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.9 Fifth Amendment dated April 14, 1994 to License Agreement
between the Company and the Massachusetts Institute of
Technology dated December 14, 1987 (filed as Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended March 31, 1994
and incorporated herein by reference).
10.10* Exclusive Distribution Agreement between the Company and
Konica Corporation dated as of November 9, 1994 (filed as
Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference).
10.11 Lease Agreement between the Company and One Nevada Realty
Trust dated October 6, 1995 (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995 and incorporated herein by
reference).
10.12 Sixth Amendment dated March 1, 1996 to License Agreement
between Matritech and the Massachusetts Institute of
Technology dated December 31, 1987, as amended (filed as
Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 and incorporated
herein by reference).
10.13 Senior Loan and Security Agreement No. 0096 between the
Company and Phoenix Leasing, Incorporated dated August 29,
1997 including form of Senior Secured Promissory Note
between the Company and Phoenix Leasing, Incorporated (filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.14* Distributorship Agreement by and between the Company and
Curtin Matheson Scientific, a division of Fisher Scientific
Company, L.L.C. dated as of March 19, 1998 (filed as Exhibit
10.21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein
by reference).
10.15 Form of Subscription Agreement dated March 10, 1999 by and
between the Company and certain investors (filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein
by reference).
10.16 Form of Common Stock and Warrant Purchase Agreement dated
November 22, 1999 between the Company and the several
investors (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated November 22, 1999 and incorporated
herein by reference).
10.17 Form of Warrant Agreement dated November 22, 1999 issued by
the Company to the several investors (filed as Exhibit 4.2
to the Company's Current Report on Form 8-K dated November
22, 1999 and incorporated herein by reference).
23** Consent of Arthur Andersen LLP.
27** Financial Data Schedule.
</TABLE>
- --------------------------------------------------------------------------------
* Confidential Treatment Granted for portions thereof
** Filed herewith
20
<PAGE> 22
# Indicates management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this
report.
(b) Reports on Form 8-K. Not Applicable.
(c) Exhibits. The Company hereby files as exhibits to this Form 10-K those
exhibits listed in Item 14(a)(3), above.
(d) Financial Statement Schedules. The Company hereby files as financial
statement schedules to this Form 10-K those financial statement schedules
listed in Item 14(a)(2), above.
21
<PAGE> 23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, IN THE CITY OF NEWTON,
COMMONWEALTH OF MASSACHUSETTS, ON THE 30TH DAY OF MARCH, 2000.
Matritech, Inc.
By: /s/ STEPHEN D. CHUBB
------------------------------------
Stephen D. Chubb
Director, Chairman and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN D. CHUBB Director, Chairman, and Chief March 30, 2000
- --------------------------------------------------- Executive Officer (Principal
Stephen D. Chubb Executive Officer)
/s/ DAVID L. CORBET Director, President and Chief March 30, 2000
- --------------------------------------------------- Operating Officer
David L. Corbet
/s/ JOHN S. DOHERTY, JR. Vice President, Chief Financial March 30, 2000
- --------------------------------------------------- Officer and Treasurer
John S. Doherty, Jr. (Principal Accounting and
Financial Officer)
/s/ J. ROBERT BUCHANAN Director March 30, 2000
- ---------------------------------------------------
J. Robert Buchanan
/s/ DAVID RUBINFIEN Director March 30, 2000
- ---------------------------------------------------
David Rubinfien
/s/ RICHARD SANDBERG Director March 30, 2000
- ---------------------------------------------------
Richard Sandberg
/s/ T. STEPHEN THOMPSON Director March 30, 2000
- ---------------------------------------------------
T. Stephen Thompson
/s/ C. WILLIAM ZADEL Director March 30, 2000
- ---------------------------------------------------
C. William Zadel
</TABLE>
22
<PAGE> 24
MATRITECH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999....................................... F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Matritech, Inc.:
We have audited the accompanying balance sheets of Matritech, Inc. (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Matritech, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 9, 2000
F-2
<PAGE> 26
MATRITECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,146,821 $ 5,612,194
Accounts receivable....................................... 162,261 211,016
Inventories............................................... 336,398 300,897
Interest receivable and prepaid expenses.................. 113,582 112,656
------------ ------------
Total current assets.............................. 4,759,062 6,236,763
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Laboratory equipment...................................... 1,418,042 1,454,823
Office equipment.......................................... 212,698 212,698
Laboratory furniture...................................... 62,739 62,739
Leasehold improvements.................................... 56,981 56,981
------------ ------------
1,750,460 1,787,241
Less -- Accumulated depreciation and amortization......... 1,065,060 1,186,501
------------ ------------
685,400 600,740
------------ ------------
OTHER ASSETS, net........................................... 67,363 65,072
------------ ------------
$ 5,511,825 $ 6,902,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of note payable........................ $ 68,271 $ 76,744
Accounts payable.......................................... 329,660 274,188
Accrued expenses.......................................... 573,422 536,745
Deferred revenue.......................................... -- 7,750
------------ ------------
Total current liabilities......................... 971,353 895,427
------------ ------------
NOTE PAYABLE, less current maturities....................... 140,491 63,688
------------ ------------
Commitments (Notes 3 and 6)
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 -- 18,626,602 shares in 1998 and
23,552,984 shares in 1999.............................. 186,266 235,530
Additional paid-in capital................................ 45,364,731 52,983,162
Accumulated deficit....................................... (41,151,016) (47,275,232)
------------ ------------
Total stockholders' equity........................ 4,399,981 5,943,460
------------ ------------
$ 5,511,825 $ 6,902,575
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 27
MATRITECH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Collaborative research and development, license
fees and product sales......................... $ 747,532 $ 967,759 $ 622,808
Interest and other income......................... 566,686 457,678 224,658
----------- ----------- -----------
1,314,218 1,425,437 847,466
----------- ----------- -----------
EXPENSES:
Research and development.......................... 3,943,390 4,010,368 3,146,805
Selling, general and administrative............... 4,845,915 4,950,593 3,824,877
----------- ----------- -----------
8,789,305 8,960,961 6,971,682
----------- ----------- -----------
Net loss.................................. $(7,475,087) $(7,535,524) $(6,124,216)
=========== =========== ===========
BASIC/DILUTED NET LOSS PER COMMON SHARE............. $ (.43) $ (.40) $ (.29)
=========== =========== ===========
BASIC/DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................................ 17,512,242 18,608,784 21,126,422
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 28
MATRITECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL DEFICIT EQUITY
---------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996........... 16,032,734 $160,327 $33,764,062 $(26,140,405) $ 7,783,984
Sale of common stock, net of
commissions and issuance costs
of $92,430...................... 2,457,609 24,576 10,879,492 -- 10,904,068
Exercise of common stock options... 12,878 128 27,525 -- 27,653
Exercise of common stock
warrants........................ 55,895 560 70,822 -- 71,382
Issuance of common stock under
employee stock purchase plan.... 7,621 76 26,598 -- 26,674
Compensation related to issuance of
common stock warrants........... -- -- 350,000 -- 350,000
Net loss........................... -- -- -- (7,475,087) (7,475,087)
---------- -------- ----------- ------------ -----------
Balance, December 31, 1997........... 18,566,737 185,667 45,118,499 (33,615,492) 11,688,674
Exercise of common stock options... 43,513 435 51,400 -- 51,835
Exercise of common stock
warrants........................ 10,000 100 17,900 -- 18,000
Issuance of common stock under
employee stock purchase plan.... 6,352 64 26,932 -- 26,996
Compensation related to issuance of
common stock warrants........... -- -- 150,000 -- 150,000
Net loss........................... -- -- -- (7,535,524) (7,535,524)
---------- -------- ----------- ------------ -----------
Balance, December 31, 1998........... 18,626,602 186,266 45,364,731 (41,151,016) 4,399,981
Sale of common stock, net of
commissions and issuance costs
of $120,578..................... 4,896,305 48,963 7,407,338 -- 7,456,301
Exercise of common stock options... 27,427 274 48,508 -- 48,782
Issuance of common stock under
employee stock purchase plan.... 2,650 27 3,949 -- 3,976
Compensation related to issuance of
common stock warrants........... -- -- 158,636 -- 158,636
Net loss........................... -- -- -- (6,124,216) (6,124,216)
---------- -------- ----------- ------------ -----------
Balance, December 31, 1999........... 23,552,984 $235,530 $52,983,162 $(47,275,232) $ 5,943,460
========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 29
MATRITECH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................... $(7,475,087) $(7,535,524) $(6,124,216)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 226,924 210,648 121,441
Expense related to issuance of common stock
warrant...................................... 350,000 150,000 158,636
Changes in assets and liabilities:
Accounts receivable.......................... 712,603 (60,320) (48,755)
Inventories.................................. (144,302) 150,962 35,501
Interest receivable and prepaid expenses..... (3,755) 13,574 926
Accounts payable............................. (43,859) (49,040) (55,472)
Accrued expenses............................. (108,414) 218,518 (36,677)
Deferred revenue............................. -- -- 7,750
----------- ----------- -----------
Net cash used in operating activities..... (6,485,890) (6,901,182) (5,940,866)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment............... (456,484) (56,597) (36,781)
(Increase) decrease in other assets............... (59,820) 1,089 2,291
----------- ----------- -----------
Net cash used in investing activities..... (516,304) (55,508) (34,490)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from note payable........................ 288,376 -- --
Payments on note payable.......................... (18,881) (60,734) (68,330)
Proceeds from sale of common stock and warrants... 10,904,068 -- 7,456,301
Proceeds from the exercise of common stock
warrants....................................... 71,382 18,000 --
Proceeds from exercise of common stock options.... 27,653 51,835 48,782
Proceeds from issuance of common stock under
employee stock purchase plan................... 26,674 26,996 3,976
----------- ----------- -----------
Net cash provided by financing
activities.............................. 11,299,272 36,097 7,440,729
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.... 4,297,078 (6,920,593) 1,465,373
Cash and Cash Equivalents, beginning of year........ 6,770,336 11,067,414 4,146,821
----------- ----------- -----------
Cash and Cash Equivalents, end of year.............. $11,067,414 $ 4,146,821 $ 5,612,194
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest............ $ 5,420 $ 28,479 $ 21,625
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 30
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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 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 NMP22, 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 the development of its future products.
In 1995, the Company began to sell its NMP22(R) Test Kits for bladder
cancer in certain countries in Europe through distributors. In 1996, the Company
received FDA approval to begin selling the NMP22 Test Kit as a prognostic
indicator for use in the management of bladder cancer patients in the United
States and in May 1998 the Koseisho approved the NMP22 Test Kit for sale in
Japan for screening of bladder cancer patients. In March 1998 the Company and
Curtin Matheson Scientific, now Fisher Diagnostics, a division of Fisher
Healthcare LLC ("Fisher") entered into a co-exclusive distribution agreement for
the NMP22 Test Kit for bladder cancer in the United States. In August 1999 the
People's Republic of China's State Drug Administration approved the NMP22 Test
Kit for the detection and management of bladder cancer. In September 1999 the
Company entered into a distribution agreement with General Biologicals
Corporation for the distribution of the NMP22 Test Kit in connection with an
annual screening program in Taiwan.
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the accompanying
financial statements and notes.
(a) Revenue Recognition
The Company recognizes revenue from product sales upon shipment; revenue
from collaborative research and development arrangements as milestones are
achieved; revenue from nonrefundable license agreements upon the signing of the
agreement; and revenue from research grants as earned.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition on Financial
Statements. SAB 101 will require companies to recognize certain upfront
non-refundable fees and milestone payments over the life of the related alliance
when such fees are received in conjunction with alliances which have multiple
elements. The Company is required to adopt this new accounting principle through
a cumulative charge to the statement of operations, in accordance with APB No.
20, Accounting Changes, no later than the second quarter of fiscal 2000. The
Company believes that the adoption of SAB 101 will not have an impact on its
future operating results.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents. The Company applies
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates fair market value,
and are classified as held-to-maturity. These securities include cash and cash
equivalents, which consist of auction market preferred stocks, money market
accounts and repurchase agreements at December 31, 1998 and 1999.
F-7
<PAGE> 31
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Inventories
Inventories are stated at the lower of cost or market and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials.......................................... $225,159 $179,316
Work-in-process........................................ 3,195 1,464
Finished goods......................................... 108,044 120,117
-------- --------
$336,398 $300,897
======== ========
</TABLE>
(d) Depreciation and Amortization
The Company provides for depreciation and amortization using accelerated
and straight-line methods by charges to operations in amounts that allocate the
cost of property and equipment over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -------------
<S> <C>
Laboratory equipment................................... 10 years
Office equipment....................................... 5 years
Laboratory furniture................................... 5 years
Leasehold improvements................................. Life of lease
</TABLE>
The Company amortizes certain intangible assets, including license fees,
over their estimated useful lives of three to five years.
(e) Uses of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
The Company places its investments in highly rated financial institutions and
investment-grade securities. The Company has not experienced any losses on its
investments to date.
The Company received revenue of greater than 10% of total collaborative
research and development, license fees and product sales from the following
number of customers during the following periods:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRODUCT REVENUE CUSTOMER
------------------------
A B C D
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997............................. 2 -- -- 19% 18%
Year ended December 31, 1998............................. 2 -- 31% -- 29%
Year ended December 31, 1999............................. 2 30% 49% -- --
</TABLE>
F-8
<PAGE> 32
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company had accounts receivable balances greater than 10% of total
accounts receivable from the following customers as of December 31, 1998 and
1999:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
ACCOUNTS RECEIVABLE CUSTOMER
--------------------------------------
A B C D E F
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
As of December 31,
1998............................................ -- -- -- 60% 11% 12%
1999............................................ 12% 47% 11% 19% -- --
</TABLE>
(g) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and note payable. The
carrying amounts of the Company's financial instruments approximate the
estimated fair value at December 31, 1998 and 1999. The estimated fair values
have been determined through information obtained from market sources and
management estimates.
(h) Research and Development
Research and development expenses in the accompanying statements of
operations are expensed as incurred and include both funded and unfunded
research and development expenses.
(i) 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 was 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. The number of common
stock potentially dilutive shares excluded from the diluted net loss per share
were 1,497,176, 1,649,391 and 2,694,156 for the years ended December 31, 1997,
1998 and 1999, respectively.
(j) Postretirement Benefits
The Company has no obligations for postretirement benefits as defined by
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, as it does not currently offer such benefits.
(k) Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in the
annual financial statements. It also requires that an entity classify items of
other comprehensive earnings (e.g., foreign currency translation adjustments and
unrealized gains and losses on certain marketable securities) by their nature in
an annual financial statement. The Company's total comprehensive loss was the
same as the reported net loss for all periods presented.
F-9
<PAGE> 33
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current
tax liability or asset for current taxes payable or refundable and a deferred
tax liability or asset for the estimated future tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting and their tax basis and carryforwards to the extent they are
realizable. The net operating loss carryforwards and tax credits expire as
follows:
<TABLE>
<CAPTION>
FEDERAL NET STATE NET
OPERATING LOSS OPERATING LOSS TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
- --------------- -------------- -------------- -------------
<S> <C> <C> <C>
2000..................................... -- $ 3,715,000 --
2001..................................... -- 3,986,000 --
2002..................................... -- 2,048,000 --
2003..................................... -- 3,925,000 --
2004-2019................................ $37,497,000 10,248,000 $1,952,000
----------- ----------- ----------
$37,497,000 $23,922,000 $1,952,000
=========== =========== ==========
</TABLE>
The Company's net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 14,008,000 $ 15,428,000
Capitalized research and development expenses... 3,530,000 4,006,000
Tax credits..................................... 1,719,000 1,952,000
Temporary differences........................... (21,000) (51,000)
------------ ------------
Net deferred tax asset........................ 19,236,000 21,335,000
Valuation allowance............................. (19,236,000) (21,335,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
A full valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax asset.
(3) LEASE COMMITMENTS
The Company leases office and laboratory facilities and certain equipment
under operating leases that expire through 2002. Total commitments due in 2000,
2001 and 2002 are approximately $244,000, $3,000 and $3,000, respectively. Rent
expense for the years ended December 31, 1997, 1998 and 1999 was approximately
$275,000, $275,000, and $283,000, respectively.
(4) NOTE PAYABLE
In August 1997, the Company entered into an equipment line of credit under
which it could borrow up to $1,200,000 for equipment purchases. This line of
credit expired and in October 1997, the outstanding balance was converted into a
48 month term note. The term note has an outstanding balance of $140,432 at
December 31, 1999 which is due in 2000 and 2001 and bears interest at 11.75% and
is secured by the underlying equipment.
F-10
<PAGE> 34
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMON STOCK
(a) Sale of Common Stock
In May 1997, the Company completed a private placement of 2,200,000 shares
of common stock at $5 per share resulting in proceeds of $10,904,000, net of
commissions and issuance costs. In connection with the private placement, the
Company issued to the placement agent 257,609 shares of common stock and a
warrant to purchase 245,761 shares of common stock at $5 per share. During 1997,
5,530 of these warrants were exercised for 1,395 shares of common stock. In
1999, these warrants were repriced to $2.50 per share to more accurately reflect
the level of the stock price at the repricing date. The Company recorded
approximately $87,000 as a component of selling, general and administrative
expenses in 1999 for the repricing.
In April 1999, the Company completed a private placement of 3,094,965
shares of its common stock at resulting in net proceeds of $3,910,000 after
deducting the transaction expenses. In November 1999, the Company completed
another private placement of 1,801,340 shares of common stock at $2 per share
resulting in proceeds of $3,546,000 after deducting the transaction expenses. In
connection with the second private placement, the Company issued to the
investors warrants to purchase 900,670 shares of common stock at $2.20 per
share. These warrants are exercisable over a period of two years and are
callable by the Company if certain common stock price levels are reached during
this two year period.
(b) Warrants
In connection with a private placement in September 1994, the Company
issued a warrant to purchase 234,637 units at an exercise price equal to $2.25
per unit to the placement agent ("Placement Agent Warrants"). Each Placement
Agent Warrant converts into one share of common stock and one Class B
nonredeemable common stock purchase warrant. During 1996, 214,637 of the
Placement Agent Warrants and 204,637 of the underlying Class B non redeemable
common stock purchase warrants were exercised for net proceeds of $757,000,
pursuant to which the Company issued 400,693 shares of common stock. At December
31, 1999, all outstanding warrants had expired.
In April 1997, the Company issued a warrant to a public relations
consultant for the purchase of up to 150,000 shares of the Company's common
stock for a price of $6.50 per share expiring in April 2002. These warrants were
valued at $500,000 in accordance with SFAS No. 123 and were expensed ratably
over the one-year term of the agreement. The Company expensed $150,000 and
$350,000 as a component of selling, general and administrative expense on the
accompanying statement of operations for the years ended December 31, 1998 and
1997, respectively. In 1999, these warrants were repriced to $2.50 per share to
more accurately reflect the level of the stock price at the repricing date. An
additional $72,000 was expensed as a component of selling, general and
administrative expense on the accompanying statement of operations for the year
ended December 31, 1999 to record compensation expense associated with the
repricing.
(c) Stock Option and Purchase Plans
The Company has granted incentive and nonqualified options under its 1988
and 1992 option plans and the 1992 Directors' Plan. All option grants, prices
and vesting periods are determined by the Board of Directors. Incentive stock
options must be granted at a price not less than the fair market value on the
date of grant.
F-11
<PAGE> 35
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
There are 123,939 common shares available for future grants under existing
option plans at December 31, 1999. The following table summarizes stock option
activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OPTION PRICE AVERAGE
OF OPTIONS PER SHARE PRICE PER SHARE
---------- -------------- ---------------
<S> <C> <C> <C>
Options outstanding, December 31, 1996..... 919,778 $ .82 - $13.13 $6.20
Granted.................................. 195,671 4.00 - 8.06 6.04
Exercised................................ (12,878) 1.37 - 4.00 2.15
Terminated............................... (55,626) 1.81 - 12.00 8.62
--------- -------------- -----
Options outstanding, December 31, 1997..... 1,046,945 .82 - 13.13 6.09
Granted.................................. 320,725 1.44 - 4.38 2.31
Exercised................................ (43,513) .82 - 4.00 1.19
Terminated............................... (114,997) .82 - 13.13 6.14
--------- -------------- -----
Options outstanding, December 31, 1998..... 1,209,160 1.37 - 13.13 5.31
Granted.................................. 472,670 .84 - 3.69 1.82
Exercised................................ (27,427) 1.37 - 2.44 1.78
Terminated............................... (221,148) 1.34 - 10.63 3.30
--------- -------------- -----
Options outstanding, December 31, 1999..... 1,433,255 $ .84 - $13.13 $4.47
========= ============== =====
Options exercisable, December 31, 1999..... 760,701 $1.44 - $13.13 $5.92
========= ============== =====
Options exercisable, December 31, 1998..... 606,221 $1.37 - $13.13 $5.92
========= ============== =====
Options exercisable, December 31, 1997..... 483,438 $ .82 - $13.13 $5.04
========= ============== =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .84 - $ 1.26.............. 150,000 9.56 $ .95 -- $ --
1.27 - 1.91.............. 323,411 7.54 1.53 115,155 1.61
1.92 - 2.88.............. 268,172 7.62 2.33 140,460 2.34
2.89 - 4.34.............. 136,138 7.35 3.73 67,411 3.68
4.35 - 6.53.............. 18,400 6.62 5.22 9,450 5.26
6.54 - 9.81.............. 476,034 6.99 7.87 367,400 7.89
9.82 - 13.13............... 61,100 6.39 13.08 60,825 13.09
--------- ---- ------ ------- ------
Total............. 1,433,255 7.50 $ 4.47 760,701 $ 5.92
========= ==== ====== ======= ======
</TABLE>
The Company has reserved and may issue up to an aggregate of 225,000 shares
of common stock under the Employee Stock Purchase Plan pursuant to which stock
is sold at 85% of fair market value, as defined. At December 31, 1998 and 1999,
the Company has accumulated payroll deductions of $3,976 and $4,500,
respectively, for the issuance of 2,650 shares and 3,000 shares of common stock,
respectively, which are issued in the following year to employees pursuant to
the plan. At December 31, 1999, 187,275 shares are available for issuance under
the plan.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of
F-12
<PAGE> 36
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock options, including stock purchase plans, or warrants granted to employees
to be included in the statement of operations or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No.
123. The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1997, 1998 and 1999 and stock issued pursuant to the
stock purchase plan using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The weighted average assumptions used for 1997, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rate............... 5.83% - 6.86% 4.65% - 5.56% 4.65% - 6.38%
Expected dividend yield............... -- -- --
Expected life......................... 7 years 7 years 7 years
Expected volatility................... 65% 65% 65%
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The total fair value of the options granted during 1997, 1998 and 1999 was
computed as approximately $819,000, $504,000 and $530,000, respectively. Of
these amounts, approximately $1,130,000, $1,143,000 and $1,140,000 would be
charged to operations for the years ended December 31, 1997, 1998 and 1999,
respectively. The remaining amount, approximately $1,438,000, would be amortized
over the remaining vesting period of the underlying options. The resulting pro
forma compensation expense may not be representative of the amount to be
expected in future years as pro forma compensation expense may vary based upon
the number of options granted.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial portion of the stock options granted
are incentive stock options and the Company does not anticipate a future
deduction associated with the exercise of these stock options.
The pro forma effect of SFAS No. 123 for the years ended December 31, 1997,
1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997
--------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.......................................... $(7,475,087) $(8,605,405)
=========== ===========
Basic and diluted net loss per share.............. $ (.43) $ (.49)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.......................................... $(7,535,524) $(8,678,197)
=========== ===========
Basic and diluted net loss per share.............. $ (.40) $ (.47)
=========== ===========
</TABLE>
F-13
<PAGE> 37
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999
--------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.......................................... $(6,124,216) $(7,264,040)
=========== ===========
Basic and diluted net loss per share.............. $ (.29) $ (.34)
=========== ===========
</TABLE>
(d) Reserved Shares
As of December 31, 1999, the following shares of common stock were reserved
and available for future issuance:
<TABLE>
<S> <C>
Stock Option Plans........................................ 1,557,194
1992 Employee Stock Purchase Plan......................... 187,275
Exercise of warrants outstanding.......................... 1,290,901
---------
3,035,370
=========
</TABLE>
(6) LICENSE AGREEMENT
(a) MIT License Agreement
MIT has granted the Company a worldwide exclusive license to certain
technology, which was extended when the Company obtained FDA approval of its
first cancer diagnostic product in 1996, until the expiration of all patent
rights in 2006. Pursuant to the license agreement, the Company pays royalties on
the sales of products incorporating the licensed technology. The Company paid
$19,096, $17,776 and $6,944 in royalties in the years ended December 31, 1997,
1998, and 1999, respectively.
(b) Hybritech License Agreement
In August 1994, the Company entered into a non-exclusive license agreement
with Hybritech, Inc. for the manufacture and sale of certain patented technology
for immunometric assays using monoclonal antibodies. The Company is required to
pay a royalty equal to the greater of 8% of net sales of licensed products or
$25,000 per year until the expiration of patent rights on a country-by-country
basis beginning in 2000 through 2008. The Company paid $53,863, $25,000 and
$42,540 in royalties during the years ending December 31, 1997, 1998 and 1999,
respectively.
(7) COLLABORATION AGREEMENTS
(a) Joint Development and Distribution with Bayer
In 1995, Matritech signed a joint development and distribution agreement
with Bayer for the identification of cervical cancer-specific NMPs and the
development of monoclonal antibodies which recognize malignant and pre-malignant
or dysplastic cervical cancer cells. In the year ended December 31, 1997, the
Company recorded revenue of $140,000. No revenue was recorded in the years ended
December 31, 1998 and 1999.
In December 1997, Matritech submitted pre-clinical evaluation data to Bayer
which had been providing funding for this project. After a period of discussion
between the two companies Bayer elected not to proceed with the project. Bayer's
option to develop and launch an automated cervical cancer instrument for use
with NMP-179 has terminated and Bayer is no longer obligated to provide further
funding towards the commercialization of the system.
Matritech has regained all marketing and product rights which had been
granted to Bayer Corporation in the cervical cancer development and supply
agreement between the two companies.
F-14
<PAGE> 38
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Yamanouchi Pharmaceutical Co., Ltd.
On November 10, 1998 the Company amended its development and supply
agreement with Yamanouchi Pharmaceutical, Co., Ltd. resulting in the termination
of development, supply and marketing rights. In addition, Matritech reacquired
all rights under the agreement in exchange for a two-percent royalty on future
product sales covered by this agreement, sold in Japan, not to exceed
$2,000,000.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Payroll and related costs.............................. $245,777 $165,389
Professional fees...................................... 222,107 164,377
Royalties.............................................. 55,598 12,882
Clinical trials costs.................................. 37,484 78,119
Marketing expenses..................................... 12,456 28,035
Other.................................................. -- 87,943
-------- --------
$573,422 $536,745
======== ========
</TABLE>
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has 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 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. To date, the Company has viewed its operations and manages its business
as principally one segment, the sale of cancer 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.
Geographic information product sales by destination as a percentage of
total product sales are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
United States............................................... 42% 52% 53%
Europe...................................................... 37 36 4
Japan....................................................... 1 6 30
All other................................................... 20 6 13
--- --- ---
100% 100% 100%
</TABLE>
Product sales were $602,000, $895,000 and $623,000 in the years ended
December 31, 1997, 1998, and 1999, respectively. All of the Company's products
were shipped from its facilities located in the United States.
F-15
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-99724, 33-87432, 33-50244, 33-93198,
333-11913, 333-30179, 333-57319, 333-76973, and 333-92719.
Arthur Andersen LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,612,194
<SECURITIES> 0
<RECEIVABLES> 211,016
<ALLOWANCES> 0
<INVENTORY> 300,897
<CURRENT-ASSETS> 6,236,763
<PP&E> 1,787,241
<DEPRECIATION> 1,186,501
<TOTAL-ASSETS> 6,902,575
<CURRENT-LIABILITIES> 895,427
<BONDS> 0
0
0
<COMMON> 235,530
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,902,575
<SALES> 622,808
<TOTAL-REVENUES> 847,466
<CGS> 0
<TOTAL-COSTS> 6,971,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,124,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,124,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,124,216)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
