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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, 2000.
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)
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 928-0820
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE
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. []
Aggregate market value, as of March 1, 2001, of Common Stock held by
non-affiliates of the registrant: $93,659,622 based on the last reported sale
price on the Nasdaq Stock Market.
Number of shares of Common Stock outstanding on March 1, 2001: 25,837,137
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,
2000. 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 cervical cancer and is
developing additional tests for breast, colon and prostate cancer. 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 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 in the United
States. In 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 Company has an
exclusive distribution agreement for the NMP22 Test Kit in Japan with Konica
Corporation ("Konica"). In 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 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 NMP22
Test Kit has been commercially available in Europe since 1995 and is distributed
through the Company's subsidiary, Matritech GmbH, and other distributors
throughout Europe. The NMP22 Test Kit is currently being marketed in Asia and in
many other countries worldwide. The Company has retained worldwide manufacturing
rights for the NMP22 Test Kit as well as certain marketing rights in the United
States.
Test for Cervical Cancer. The Company has also identified an NMP specific
to cervical cancer and has developed a diagnostic test, the NMP179 Test, based
on its proprietary NMP technology for this cancer type. Matritech's scientists
have reported the results of preclinical trials of its NMP179 Test for the
identification of women with cancer or precancerous 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 NMP179
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 NMP179
Test in preparation for conducting FDA clinical trials to obtain approval to
market the test in the United States. The Company plans to conduct this testing
in conjunction with a partner or partners of automated instruments for the
analysis of the cells obtained during the Pap smear procedure. Discussions with
suitable cervical specimen automation partners are underway.
Breast, Colon and Prostate Cancer Tests. Using mass spectrophotometric
techniques, Matritech scientists have detected the presence of NMPs in the blood
of women with breast cancer which are absent in
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(*) NMP22(R) is a registered trademark and NMP179(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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the blood of women without breast cancer, as well as those with fibroadenoma, a
benign breast disease. In August 2000, Matritech reported that its scientists
had identified proteins in the blood of patients with colon cancer, which were
not present in the blood of individuals without cancer nor in the blood of
patients with certain benign conditions of the lower digestive tract. Subsequent
testing has revealed that the proteins are also present in the blood of
individuals with certain "high-risk" polyps of the colon and those with
diverticulitis. The Company's clinical consultants have commented that the
identification of high risk polyps could be a desirable feature for a colon
cancer screening test and that the symptoms of diverticulitis would not be
confused with colon cancer. 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 indolent disease, thereby indicating the extent of treatment necessary.
Other Diagnostic Products. In June 2000, the Company acquired ADL GmbH,
now called Matritech GmbH, a European distributor of diagnostic testing
products, including the Company's NMP22 Test Kit for bladder cancer. In
addition, Matritech GmbH distributes allergy and other diagnostic testing
products on behalf of several manufacturers with which it holds distribution
agreements, the most significant of which is with Hitachi Chemical Diagnostics
for their CLA Allergy Test System.
Matritech was incorporated in Delaware in October 1987. The Company's
headquarters 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.
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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 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. During the past two years,
the Company's scientists have used mass spectrometry to discover and identify
proteins in the blood of cancer patients, which are absent from the blood of
individuals without cancer. During this period, the Company has reported its
identification of cancer proteins for both breast and colon cancer and is
currently analyzing blood from prostate cancer patients to identify proteins
specific to that cancer.
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 claims contained in these patents in 2006. The Company has
made additional advances in NMP technology and has filed its own patent
applications and acquired patent rights or such advances in the United States,
as well as corresponding applications and patent rights in selected foreign
countries. To date, Matritech has been granted fourteen 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 700 subjects
at 14 clinical trial 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 1998, the NMP22 Test Kit for bladder cancer was approved for sale in
Japan by Koseisho for use in screening previously undiagnosed individuals. In
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, in Europe through its
German subsidiary, Matritech GmbH, 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 enables urologists
to identify and manage bladder cancer patients with less invasive and less
frequent procedures, thereby potentially reducing treatment
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costs while maintaining a high standard of patient care. If the level of the
NMP22 marker in a bladder cancer patient 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, a level of NMP22
marker 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 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 an exclusive distribution agreement in Japan with Konica.
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 1998, the Company entered into a distribution
agreement with Fisher whereby 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 1999, the
Company entered into a distribution agreement with General Biologicals
Corporation for the distribution of the NMP22 Test Kit 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.
Cervical Cancer Product (NMP179)
Matritech's scientists have reported the results of preclinical trials of
its NMP179 Test for the identification of women with cancer or precancerous
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 NMP179 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. The Company plans to conduct
these trials with a partner or partners using their automated instrumentation in
conjunction with NMP179 to identify women with cervical cancer and high risk
precancer. 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
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 women with
breast cancer and by contrast, found no evidence of such proteins in the blood
of any of the women without breast cancer. In March 2000, the Company announced
that its scientists detected the presence of NMPs in the blood of women with
breast cancer which are absent in the blood of women without breast cancer as
well as those with fibroadenoma, a benign breast disease. The Company is
investigating opportunities to offer NMP66 testing services directly from
clinical laboratories with which it would have a partnership. 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.
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Colon Cancer Product
The Company is also developing a blood-based colon cancer test based upon
the NMP identified using its mass spectrophotometric discovery procedure. 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 to validate the
performance of its mass spectrophotometer-detected protein. The Company intends
to conduct the specimen testing in collaboration with an automated instrument
partner or clinical laboratory. Consequently, the timing of the launch of a
product or testing service using 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 clinical
laboratories and automated instrument partners for this test.
Prostate Cancer Product
In 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 indolent forms of prostate cancer, thereby
indicating the extent of treatment necessary. The Company's scientists are
testing blood specimens from men with prostate cancer using mass
spectrophotometric techniques similar to those used to discover cancer proteins
for breast and colon cancer. The Company believes that it will be successful in
identifying cancer proteins for prostate cancer suitable for routine use by
clinical laboratories in the management of prostate cancer patients. A previous
study reported by Dr. Partin and his investigators at the Johns Hopkins School
of Medicine found that the level of an NMP was elevated in the majority of
life-threatening aggressive tumors and was 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. The Company has retained worldwide
manufacturing and marketing rights for its prostate cancer product under
development. The Company is seeking clinical laboratories and automated
instrument partners 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 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
two full-time sales representatives in the United States. The Company's German
subsidiary, Matritech GmbH, which was acquired in June 2000, along with
additional distributors, sells the product in Europe. Matritech GmbH currently
has five full-time sales representatives. In the rest of the world, the Company
sells the NMP22 Test Kit through distributors.
During the year ended December 31, 2000, the Company received approximately
13% and 18% of its revenue from Konica and Fisher, respectively. 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, 1998, 1999 and 2000, 52%, 53% and 19%,
respectively, of the Company's total product sales were from the United States
and 48%, 47% and 81%, respectively, were from foreign countries. Product sales
generated outside the United States during the years ended December 31, 1998 and
2000 was primarily from Europe. For the year ended December 31, 1999, product
sales generated outside of the United States were primarily from Asia. See Note
9 of Notes to Consolidated Financial Statements -- "Segment and Geographic
Information."
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FOREIGN OPERATIONS
In June 2000, the Company acquired all of the outstanding shares of capital
stock of ADL GmbH, Gesellschaft fur Allergie, Diagnostika und Laborkonzepte
("ADL"), now called Matritech GmbH, a European distributor of diagnostic testing
products, including the Company's NMP22 Test Kit for bladder cancer. Matritech
GmbH is located in Freiburg, Germany. This acquisition was accounted for as a
purchase, and accordingly the results of operations of Matritech GmbH from June
28, 2000 forward are included in the Company's consolidated statements of
operations.
The aggregate purchase price of $801,000 consisted of assumed liabilities
of $700,000 and acquisition costs of $101,000. The purchase price was allocated
based upon the fair value of the tangible and intangible assets acquired. Total
tangible assets acquired were $533,000 comprised of current assets of $311,000,
net fixed assets of $201,000 and other assets of $21,000. Goodwill of $268,000
was recorded in connection with the acquisition and is being amortized ratably
over three years.
In connection with the acquisition, the Company issued 37,153 shares of the
Company's common stock to the former shareholders of ADL. These shares are
restricted subject to continued employment of the ADL shareholders. This
issuance of shares was valued at $214,300, and is being recorded ratably as
compensation over the three year employment period.
At December 31, 2000, approximately 7% of the Company's total assets were
located at the German subsidiary, and approximately 54% of its revenue and 11%
of its expenses, including cost of product sales, for fiscal year 2000 were
related to this European operation.
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.
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, 2005. The annual base rent for each year of
the term is $405,000. 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
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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" below.
COMPETITION
Matritech is not aware of any other company selling diagnostic or
therapeutic products based on NMP technology. 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 diagnostic testing 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 NMP179 cervical cancer product
being 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, Hybrid Capture II
("HCII"), for use in detecting HPV, 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 do not progress to
cervical cancer. Nevertheless, the test for HPV may be selected by some
gynecologists and clinical pathologists to identify women at higher risk of
developing cervical cancer.
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. The Company currently is not developing any therapeutic products.
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.
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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. 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 fourteen additional United States patents and eight
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 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
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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.
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
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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 to validate the performance of a
NMP-based test employing its colon cancer NMPs. The Company intends to conduct
the specimen testing in collaboration with an automated instrument partner or
clinical laboratory. Consequently, the timing of a product launch 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
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.
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
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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 1998, Koseisho approved the NMP22 Test Kit for sale in
Japan for use in screening previously undiagnosed patients. In 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 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.
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EMPLOYEES
As of March 1, 2001, the Company had 42 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 1998, 1999 and 2000 Matritech spent approximately $3.3 million, $2.5
million and $2.3 million, respectively, on research and development.
Substantially all of these expenditures were related to the development of
diagnostic products.
ITEM 2. PROPERTIES.
The Company leases corporate headquarters, research and development and
manufacturing facilities in Newton, Massachusetts which occupy approximately
22,500 square feet. The Company's lease is for a term of five years and expires
on December 31, 2005. The annual base rent for each year of the term is
$405,000. Additionally, the Company leases sales office space in Freiburg,
Germany of approximately 5,400 square feet. The German lease is for a term of
five years and expires on January 31, 2006. The annual base rent for each year
of the term is approximately $50,000.
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 2000.
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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 bid price
information for the Common Stock as reported by the Nasdaq National Market.
HIGH LOW
---- ---
FISCAL 1999
First Quarter............................................... $ 2 3/8 $1 1/8
Second Quarter.............................................. 1 11/16 1 5/32
Third Quarter............................................... 4 23/32 1/2
Fourth Quarter.............................................. 5 15/32 1 7/8
FISCAL 2000
First Quarter............................................... $19 3/8 $2 7/8
Second Quarter.............................................. 10 1/2 3 9/16
Third Quarter............................................... 9 11/16 3
Fourth Quarter.............................................. 7 1/16 2
As of March 1, 2001, there were approximately 332 shareholders of record.
The Company believes that shares of the Company's Common Stock held in bank,
money management, institution and brokerage house "nominee" names may account
for an estimated 11,400 additional beneficial holders.
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, 2000, the Company issued the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):
On June 28, 2000, the Company acquired all of the outstanding capital stock
of ADL, now called Matritech GmbH. In connection with this acquisition, an
aggregate of 37,153 shares of the Company's Common Stock were issued in exchange
for all of the outstanding shares of ADL.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for each year in the five-year
period ended December 31, 2000 have been derived from the Company's consolidated
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.
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA:
Revenue:
Product sales and collaboration
fees............................. $ 1,881,833 $ 747,532 $ 967,759 $ 622,808 $ 1,245,611
------------ ------------ ------------ ------------ ------------
Expenses:
Cost of product sales.............. 149,391 746,659 749,436 603,349 983,466
Research & development............. 3,760,402 3,196,731 3,260,932 2,543,456 2,295,097
Selling, general &
administrative................... 3,665,298 4,840,495 4,922,114 3,803,252 5,130,124
------------ ------------ ------------ ------------ ------------
Total operating expenses.... 7,575,091 8,783,885 8,932,482 6,950,057 8,408,687
------------ ------------ ------------ ------------ ------------
Loss from operations........ 5,693,258 8,036,353 7,575,091 6,327,249 7,163,076
Interest income.................... 528,583 566,686 457,678 224,658 345,644
Interest expense................... -- 5,420 28,479 21,625 18,822
------------ ------------ ------------ ------------ ------------
Net loss.................... $ (5,164,675) $ (7,475,087) $ (7,535,524) $ (6,124,216) $ (6,836,254)
============ ============ ============ ============ ============
Basic/diluted net loss per common
share(1)........................... $ (0.32) $ (0.43) $ (0.40) $ (0.29) $ (0.28)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding(1).............. 15,900,467 17,512,242 18,608,784 21,126,422 24,802,015
============ ============ ============ ============ ============
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 6,770,336 $ 11,067,414 $ 4,146,821 $ 5,612,194 $ 4,661,005
Working capital...................... 7,165,462 10,989,534 3,787,709 5,341,336 4,587,611
Total assets......................... 8,669,861 12,691,773 5,511,825 6,902,575 6,595,468
Accumulated deficit.................. (26,140,405) (33,615,492) (41,151,016) (47,275,232) (54,111,486)
Total stockholders' equity........... $ 7,783,984 $ 11,688,674 $ 4,399,981 $ 5,943,460 $ 5,568,008
- ---------------
(1) Basic and diluted net loss per share are the same for all periods presented.
See Note 1 of Notes to Consolidated 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 statemenets 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.
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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 expects to incur significant
operating losses for at least the next several years. For the period from
inception to December 31, 2000, the Company incurred a cumulative net loss of
approximately $54.1 million.
The results of operations for the year ended December 31, 2000 include the
activities of the Company's German subsidiary, Matritech GmbH, from June 28,
2000 (the date of acquisition) to December 31, 2000. Matritech GmbH distributes
the Company's product and other third-party products in Europe.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Product sales increased to $1,246,000 from $623,000 for the year ended
December 31, 2000 and 1999, respectively. This increase was primarily due to the
Company's acquisition of Matritech GmbH on June 28, 2000 along with an increase
in sales to Europe and other international locations of products developed and
manufactured by Matritech. This increase was partially offset by a decrease in
sales to the United States and Japan due to the timing of distributor inventory
purchases.
Cost of product sales increased to $983,000 from $603,000 for the years
ended December 31, 2000 and 1999, respectively. As a percentage of product
sales, cost of sales decreased to 79% from 97% for the years ended December 31,
2000 and 1999, respectively. The decrease in cost of sales as a percentage of
sales is due to the inclusion of Matritech GmbH's sales of third-party products
in 2000 which carry higher margins than the products developed and manufactured
by Matritech. Matritech product margins are negatively affected by costs related
to excess capacity maintained by the Company to support planned future sales
increases.
Research and development expenses decreased to $2,295,000 for the year
ended December 31, 2000 from $2,543,000 for the year ended December 31, 1999.
The decrease was primarily due to a $150,000 reduction in bladder clinical trial
expenses incurred in 1999 in connection with the related FDA submission and
$50,000 of expense accrued in 1999 for cervical clinical trials.
Personnel-related expenses declined $77,000 due to decreased headcount, and
reliance on clinical consultants and clinical travel declined $55,000 and
$52,000, respectively, due to the absence of FDA submissions in 2000. These
decreases were offset by increases in supplies of $42,000, repairs and
maintenance of $44,000, legal expense of $28,000 and consulting of $23,000 as
the blood-based development programs began in 2000.
Selling, general and administrative expenses increased to $5,130,000 for
the year ended December 31, 2000 from $3,803,000 for the year ended December 31,
1999. The increase was primarily due to the following: $835,000 increase in
compensation expense, related to the issuance of a warrant to an investor
relations consultant in July 2000, $539,000 related to Matritech GmbH's
operations, increased consulting expense of $263,000, increased administrative
personnel costs of $162,000 due to additional headcount, and increased annual
report/proxy printing costs of $69,000. These increases were offset by a
$101,000 reduction in outside legal costs, a $236,000 reduction in sales
personnel costs and a $144,000 reduction in sales travel expenses. Sales expense
reductions are due to decreased headcount in the sales department. In addition,
advertising costs decreased $94,000 due to reduced reliance on an outside ad
agency.
Interest and other income was $346,000 for the year ended December 31, 2000
and $225,000 for the year ended December 31, 1999. The increase was due to
higher average cash balances available for investment and higher investment
yields in 2000 as compared to 1999.
The Company incurred a net loss of $6,836,000 for the year ended December
31, 1999 as compared with a net loss of $6,124,000 for the year ended December
31, 1998. The increased loss was primarily due to the increased selling, general
and administrative expenses partially offset by the increased interest income,
increased gross margin and reductions in research and development expenses.
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Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Product sales and collaboration fees decreased to $623,000 for the year
ended December 31, 1999 from $968,000 for the year ended December 31, 1998.
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 the timing of
domestic and international 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,
collaboration fees 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.
Cost of product sales decreased to $603,000 from $749,000 for the years
ended December 31, 1999 and 1998, respectively due to the decrease in product
sales. The decrease in gross margin percentage is due to the lower average unit
sales price in 1999.
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.
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.
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.
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, 2000, the Company had cash
and cash equivalents of $4,661,000 and working capital of $4,588,000.
The Company's operating activities used cash of approximately $5,710,000,
$5,941,000 and $6,901,000 for the years ended December 31, 2000, 1999, and 1998,
respectively, primarily to fund the Company's operating loss.
The Company's investing activities used cash of approximately $306,000,
$34,000 and $56,000 in the years ended December 31, 2000, 1999, and 1998,
respectively, primarily for the purchase of lab equipment, and in the 2000
period, for amounts paid in connection with the purchase of Matritech GmbH. The
Company acquired net fixed assets of $202,000 in the acquisition of Matritech
GmbH. The Company currently estimates that capital expenditures for fiscal 2001
will be approximately $400,000 primarily consisting of additional lab equipment.
The Company's financing activities provided cash of approximately
$5,073,000, $7,440,000 and $36,000 in the years ended December 31, 2000, 1999,
and 1998, respectively, primarily from the sale of equity securities and the
exercise of stock options and warrants, net of payments on the notes payable.
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The Company has a term note with Phoenix Leasing Incorporated for equipment
purchases. The term note is payable over 48 months, bears interest at 11.75% and
is secured by the underlying equipment. The outstanding balance of this note is
$63,000 at December 31, 2000.
In connection with the acquisition of Matritech GmbH, the Company assumed
certain debt obligations. At December 31, 2000, these obligations consist of a
$131,000 loan from a bank, a $48,000 third-party demand note, and $25,000 worth
of car loans. The bank loan is due in June 2004, bears interest at 5.2% and is
secured by trade receivables and inventory. The demand note will be repaid by
the Company and the Company will be reimbursed by a key Matritech GmbH employee;
the Company has recorded a corresponding asset for this employee receivable. The
car loans bear interest between 6.99% and 7.50% and are due in monthly
installments totalling $1,000.
The Company's lease on its space in Massachusetts was scheduled to expire
on December 31, 2000. In June 2000, the Company signed an amendment to the lease
agreement which extended the lease term for an additional five years, ending
December 31, 2005, and a five-year option for the period commencing January 1,
2006. The amendment provides for increases in the monthly rent amount and the
security deposit, however, the remainder of the lease terms are substantially
unchanged.
In July 2000, the Company filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission for the issuance of up to 2.45
million shares of the Company's common stock. In August 2000, the Company
entered into a common stock purchase agreement covering the sale of up to $30
million (a maximum of 2.45 million shares) of the Company's common stock with
Acqua Wellington North American Equities Fund, Ltd. ("Acqua"). Draw downs to
purchase stock are initiated at the Company's sole discretion, and the Company
sets a minimum threshold price (not less than $3.00 per share) beneath which
Acqua is not required to purchase. Draw downs are in effect for 20 consecutive
trading days after authorization by the Company, with a maximum of 12 draw
downs, each not to exceed $10 million, during the term of the agreement. Shares
are purchased at a discount (ranging from 3.0 - 4.5% depending on the threshold
price) to the market price at any time beginning in August 2000 and ending in
October 2001. If the Company has not requested draw downs in the aggregate
amount of $7.5 million by June 2001, the Company must pay Acqua either $225,000
or issue warrants to purchase 112,500 shares. During 2000, Acqua purchased
281,082 shares, with net proceeds to the Company of $1,476,000. In February
2001, Acqua purchased 198,594 shares, with net proceeds to the Company of
$895,000.
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; the competing
technological and market developments; and the ability of the Company to
establish additional development and marketing arrangements to provide funding
for research and development and to conduct clinical trials, obtain regulatory
approvals, and manufacture and market certain of the Company's products.
The Company is also actively seeking additional long-term funding for its
operations from public and private sources including strategic collaborations
and partnerships. There can be no assurance, however, that capital will be
available on terms acceptable to the Company, if at all. If the Company uses
equity to finance its capital needs, such a financing could result in
significant dilution to existing stockholders.
At December 31, 2000, the Company had $4,661,000 in cash and cash
equivalents and $4,588,000 of working capital. The Company believes that its
existing cash resources and the existing equity arrangement with Acqua will
satisfy its capital needs through 2001.
17
19
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 manufacture and market its products, to conduct
research and development, and to conduct clinical trials as currently
contemplated. The amount of additional funding needed depends on several
variables that affect the Company's capital needs, including the results of
clinical trials, the actions of regulatory agencies like the FDA and market
acceptance of the Company's products and resulting revenue streams. Although the
Company entered into an equity financing agreement that should enable it to
obtain additional financing over the near-term, depending on market conditions,
the Company will consider various financing alternatives, including equity or
debt financing and corporate partnering arrangements. There can be no assurance,
however, that this additional funding will be available on terms acceptable to
the Company, if at all. If additional financing is not available, the Company
may be required to further curtail expenses or take other steps that adversely
affect the Company's future performance.
History of Operating Losses and Anticipated Future Losses. The Company has
incurred operating losses since its inception and anticipates future losses.
While the Company expects to improve operating results in future periods, there
can be no assurance that the Company will achieve or maintain profitability or
that its revenue will grow in the future.
Fluctuation in Operating Results. The Company's future operating results
may vary significantly from quarter to quarter or from year to year depending on
a number of factors including: the timing and size of orders from the Company's
customers and distributors; regulatory approvals and the introduction of new
products by the Company; and the market acceptance of the Company's products.
The Company's current planned expense levels are based in part upon expectations
as to future revenue. Consequently, profits may vary significantly from quarter
to quarter or year to year based on the timing of revenue. Revenue or profits in
any period will not necessarily be indicative of results in subsequent periods.
Uncertainties Associated with Future Performance. The Company's success in
the market for diagnostic products will depend, in part, on the Company's
ability to: successfully develop, test, produce and market its products; obtain
necessary governmental approvals in a timely manner; attract and maintain key
employees; and successfully respond to technological changes in its marketplace.
The Company has limited internal marketing and sales resources and personnel. In
order to market successfully the Company's current and future products in the
United States, Germany and other territories in which it does not, or does not
intend to, use third-party distributors, the Company will need to develop a
larger marketing and sales force with appropriate technical expertise and
distribution capability. The Company may be unable to establish the marketing
and sales capabilities that it needs, and the Company may be unsuccessful in
gaining wide market acceptance for its products.
Near-Term Dependence Upon A Limited Number of Products. The Company
anticipates that in the near-term the Company's success will be substantially
dependent on the success of a limited number of products. The Company would
experience a material adverse effect on its business, financial condition and
results of operations if those products do not achieve wide market acceptance.
The Company's other products have not been approved by the FDA or are in
development, and there can be no assurance that the Company will be successful
with such regulatory approvals and product development.
18
20
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 customer commitments. The Company's failure or delay
in meeting its commitments could cause sales to decrease, market share to be
lost permanently, and could result in significant expenses to obtain alternative
sources of supply with the necessary facilities and know-how.
Recent Acquisition. In June 2000, the Company completed the acquisition of
Matritech GmbH. The Company faces challenges relating to integration of
operations such as coordinating geographically separate organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures. There can be no assurance that the acquired
business or its products will be successful, that the Company will successfully
integrate the acquired business into the Company, or that the Company will
achieve the desired synergies from the transaction.
Foreign Exchange. To the extent that foreign currency exchange rates
fluctuate in the future, the Company may be exposed to continued financial risk.
These can be no assurance that the Company will be successful in limiting its
exposure.
Euro Currency. In January 1999, certain member countries of the European
Union ("EU") established fixed conversion rates between their existing
currencies and the EU's common currency, the euro. The former currencies of the
participating countries are scheduled to remain legal tender as denominations of
the euro until January 2002 when the euro will be adopted as the sole legal
currency. The Company is currently assessing the impact that the conversion to
the euro will have on its European operations. The Company is evaluating the
potential impact in several areas of its business including the ability of its
information systems to handle euro-denominated transactions and the impact on
exchange costs and currency exchange rate prices. The Company is also evaluating
the impact that cross-border price transparencies, which may affect the ability
to price products differently in various countries, will have on its margin.
Although the Company is still in the assessment phase, the conversion to the
euro is not expected to have a material impact on the Company's operations or
financial position.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Investment Portfolio. The Company owns financial instruments that are
sensitive to market and interest rate risks as part of its investment portfolio.
The investment portfolio is used to preserve the Company's capital until it is
required to fund operations including the Company's research and development
activities. None of these market-risk sensitive instruments are held for trading
purposes. The Company does not use derivative financial instruments, 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 Consolidated Financial Statements -- "Operations and
Significant Accounting Policies".
Foreign Exchange. The accounts of Matritech GmbH are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In translating the
accounts of Matritech GmbH into U.S. dollars, assets and liabilities are
translated at the rate of exchange in effect at year-end, while stockholders'
equity is translated at historical rates. Revenue and expense accounts are
translated using the weighted-average exchange rate in effect during the period.
Foreign currency translation and transaction gains or losses for Matritech GmbH
are included in the accompanying consolidated statements of operations since the
functional currency for Matritech GmbH is the Deutsche Mark. The Company had
sales of approximately $667,000 denominated in foreign currency from June 28,
2000 to December 31, 2000, the period during which the acquisition was
effective.
19
21
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.
20
22
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,
2000 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,
2000 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, 2000, 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, 2000, 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, 2000, under the heading "Certain
Relationships and Related Transactions."
21
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements.
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1999 and 2000.
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000.
Notes to Consolidated Financial Statements.
2. No schedules are submitted because they are not applicable, not required
or because the information is included in the Consolidated Financial Statements
or Notes to Consolidated Financial Statements.
3. List of Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
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.
4.2 Form of Warrant Agreement and Certificate between the
Company and certain designees of Sunrise Securities Corp.
(filed as Exhibit 4.2 to the Company's Form 8-K, filed on
June 4, 1997 and incorporated herein by reference).
4.3 Form of Common Stock and Warrant Purchase Agreement between
the Company and several investors (filed as Exhibit 4.1 to
the Company's Form 8-K, filed on November 22, 1999 and
incorporated herein by reference).
4.4 Form of Warrant Agreement issued by the Company to the
several investors (filed as Exhibit 4.2 to the Company's
Form 8-K, filed on November 22, 1999 and incorporated herein
by reference).
4.5 Purchase Agreement dated June 28, 2000, by and among Petra
Urban, on behalf of Franz Maier, Eva Heidt and Joachim
Hevler, the shareholders of ADL, and Stephan Schmidt, on
behalf of the Company (filed as Exhibit 4.1 to the Company's
Form 8-K, filed on July 10, 2000 and incorporated herein by
reference).
10.1* License Agreement between the Company 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).
22
24
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
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 June 16, 2000 (filed as Exhibit
4.6 to the Company's Registration Statement No. 333-51116 on
Form S-8, filed on December 1, 2000 and incorporated herein
by reference).
10.4# Amended and Restated 1992 Non-Employee Director Stock Plan
as amended June 16, 2000 (filed as Exhibit 4.7 to the
Company's Registration Statement No. 333-51116 on Form S-8,
filed on December 1, 2000 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).
10.6 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).
10.7 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).
10.8 Fifth Amendment dated April 14, 1994 to License Agreement
between the Company and the Massachusetts Institute of
Technology dated December 14, 1987, as amended (filed as
Exhibit 10.1 to the Company's Form 10-Q for the fiscal
quarter ended March 31, 1994 and incorporated herein by
reference).
10.9* 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).
10.10** First Amendment to Agreement of Lease between the Company
and One Nevada Realty Trust dated June 22, 2000.
10.11 Sixth Amendment dated March 1, 1996 to License Agreement
between the Company and the Massachusetts Institute of
Technology dated December 14, 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).
10.12 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).
10.13* Distributorship Agreement by and between the Company and
Curtin Matheson Scientific, a division of Fisher Scientific
Company, L.L.C. dated 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).
10.14 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, 1999 and incorporated herein
by reference).
10.15 Investor Relations Warrant Agreement dated July 14, 2000, by
and among the Company and the individuals set forth on
Exhibit A thereto (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2000 and incorporated herein by reference).
23
25
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.16 Common Stock Purchase Agreement, dated August 22, 2000, by
and between the Company and Acqua Wellington North American
Equities Fund, Ltd. (filed as Exhibit 10.1 to the Company's
Form 8-K, filed on September 11, 2000 and incorporated
herein by reference).
10.17** Bank Loan between Matritech GmbH and Sparkasse Freiburg,
dated May 7, 1999.
10.18**,++ Distributorship Agreement by and between Matritech GmbH and
Hitachi Chemical Diagnostics, Inc., dated October 1, 2000.
23** Consent of Arthur Andersen LLP.
- --------------------------------------------------------------------------------
* Confidential Treatment Granted for portions thereof
** Filed herewith
# 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.
++ Confidential Treatment has been requested as to omitted portions pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(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.
24
26
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 20TH DAY OF MARCH, 2001.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN D. CHUBB Director, Chairman, and Chief March 20, 2001
- --------------------------------------------------- Executive Officer (Principal
Stephen D. Chubb Executive Officer)
/s/ DAVID L. CORBET Director, President and Chief March 20, 2001
- --------------------------------------------------- Operating Officer
David L. Corbet
/s/ JOHN S. DOHERTY, JR. Vice President, Chief Financial March 20, 2001
- --------------------------------------------------- Officer and Treasurer
John S. Doherty, Jr. (Principal Accounting and
Financial Officer)
/s/ JUDITH KURLAND Director March 20, 2001
- ---------------------------------------------------
Judith Kurland
/s/ DAVID RUBINFIEN Director March 20, 2001
- ---------------------------------------------------
David Rubinfien
/s/ RICHARD A. SANDBERG Director March 20, 2001
- ---------------------------------------------------
Richard A. Sandberg
/s/ T. STEPHEN THOMPSON Director March 20, 2001
- ---------------------------------------------------
T. Stephen Thompson
/s/ C. WILLIAM ZADEL Director March 20, 2001
- ---------------------------------------------------
C. William Zadel
25
27
MATRITECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Matritech, Inc.:
We have audited the accompanying consolidated balance sheets of Matritech,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1999 and 2000
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Matritech,
Inc. and subsidiary as of December 31, 1999 and 2000 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 12, 2001
F-2
29
MATRITECH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1999 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,612,194 $ 4,661,005
Accounts receivable, net.................................. 211,016 250,937
Inventories............................................... 300,897 334,527
Interest receivable and prepaid expenses.................. 112,656 193,182
------------ ------------
Total current assets............................... 6,236,763 5,439,651
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Laboratory equipment...................................... 1,454,823 1,831,109
Office equipment.......................................... 212,698 253,228
Laboratory furniture...................................... 62,739 62,739
Leasehold improvements.................................... 56,981 56,981
Automobiles............................................... -- 34,059
------------ ------------
1,787,241 2,238,116
Less -- Accumulated depreciation and amortization......... 1,186,501 1,456,774
------------ ------------
600,740 781,342
------------ ------------
GOODWILL, net............................................... -- 219,432
OTHER ASSETS, net........................................... 65,072 155,043
------------ ------------
$ 6,902,575 $ 6,595,468
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable....................... $ 76,744 $ 110,322
Accounts payable.......................................... 274,188 365,811
Accrued expenses.......................................... 536,745 367,474
Deferred revenue.......................................... 7,750 8,433
------------ ------------
Total current liabilities.......................... 895,427 852,040
------------ ------------
NOTES PAYABLE, less current maturities...................... 63,688 157,381
------------ ------------
Other long-term liabilities............................... -- 18,039
------------ ------------
Commitments (Notes 4 and 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value
Authorized -- 4,000,000 shares
Issued and outstanding -- none.......................... -- --
Common stock, $0.01 par value
Authorized -- 40,000,000 shares
Issued and outstanding -- 23,552,984 shares in 1999 and
25,541,282 shares in 2000.............................. 235,530 255,413
Additional paid-in capital................................ 52,983,162 59,611,684
Deferred compensation..................................... -- (178,582)
Cumulative translation adjustment......................... -- (9,021)
Accumulated deficit....................................... (47,275,232) (54,111,486)
------------ ------------
Total stockholders' equity......................... 5,943,460 5,568,008
------------ ------------
$ 6,902,575 $ 6,595,468
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
30
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
REVENUE:
Product sales and collaboration fees.............. $ 967,759 $ 622,808 $ 1,245,611
----------- ----------- -----------
EXPENSES:
Cost of product sales............................. 749,436 603,349 983,466
Research and development expense.................. 3,260,932 2,543,456 2,295,097
Selling, general and administrative expense....... 4,922,114 3,803,252 5,130,124
----------- ----------- -----------
Total operating expenses.................. 8,932,482 6,950,057 8,408,687
----------- ----------- -----------
Loss from operations...................... 7,964,723 6,327,249 7,163,076
----------- ----------- -----------
Interest income................................... 457,678 224,658 345,644
Interest expense.................................. 28,479 21,625 18,822
----------- ----------- -----------
Net loss.................................. $(7,535,524) $(6,124,216) $(6,836,254)
=========== =========== ===========
BASIC/DILUTED NET LOSS PER COMMON SHARE............. $ (0.40) $ (0.29) $ (0.28)
=========== =========== ===========
BASIC/DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................................ 18,608,784 21,126,422 24,802,015
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
31
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------- ADDITIONAL CUMULATIVE TOTAL
NUMBER PAID-IN DEFERRED TRANSLATION ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL COMPENSATION ADJUSTMENT DEFICIT EQUITY
---------- --------- ----------- ------------ ----------- ------------ -------------
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 and
warrants, 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
Sale of common stock, net of
issuance costs of
$64,051.................... 281,082 2,811 1,473,138 -- -- -- 1,475,949
Exercise of common stock
options.................... 188,204 1,882 448,131 -- -- -- 450,013
Exercise of common stock
warrants................... 1,465,264 14,653 3,378,306 -- -- -- 3,392,959
Issuance of common stock
under employee stock
purchase plan.............. 3,000 30 4,470 -- -- -- 4,500
Issuance of common stock to
consultant................. 13,595 136 89,864 -- -- -- 90,000
Compensation related to
issuance of common stock
warrants................... -- -- 1,020,684 -- -- -- 1,020,684
Deferred compensation
shares..................... 37,153 371 213,929 (214,300) -- -- --
Amortization of deferred
compensation shares........ -- -- -- 35,718 -- -- 35,718
Cumulative translation
adjustment................. -- -- -- -- (9,021) -- (9,021)
Net loss..................... -- -- -- -- -- (6,836,254) (6,836,254)
---------- -------- ----------- --------- ------- ------------ -----------
Balance, December 31, 2000..... 25,541,282 $255,413 $59,611,684 $(178,582) $(9,021) $(54,111,486) $ 5,568,008
========== ======== =========== ========= ======= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
32
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
Cash Flows from Operating Activities:
Net loss.................................................. $(7,535,524) $(6,124,216) $(6,836,254)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 210,648 121,441 205,804
Amortization of deferred compensation................... -- -- 35,718
Expense related to issuance of common stock warrant to
consultant............................................ 150,000 158,636 1,020,684
Expense related to issuance of common stock to
consultant............................................ -- -- 90,000
Changes in assets and liabilities (excluding the effects
of the ADL acquisition):
Accounts receivable................................... (60,320) (48,755) 108,280
Inventories........................................... 150,962 35,501 77,892
Interest receivable and prepaid expenses.............. 13,574 926 (56,329)
Accounts payable...................................... (49,040) (55,472) (185,698)
Accrued expenses...................................... 218,518 (36,677) (168,320)
Deferred revenue...................................... -- 7,750 (1,454)
----------- ----------- -----------
Net cash used in operating activities.............. (6,901,182) (5,940,866) (5,709,677)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (56,597) (36,781) (135,945)
(Increase) decrease in other assets....................... 1,089 2,291 (68,779)
Cash paid for acquisition costs in purchase
Of ADL, net of cash acquired............................ -- -- (100,813)
----------- ----------- -----------
Net cash used in investing activities.............. (55,508) (34,490) (305,537)
----------- ----------- -----------
Cash Flows from Financing Activities:
Payments on notes payable................................. (60,734) (68,330) (250,375)
Proceeds from sale of common stock and warrants........... -- 7,456,301 1,475,949
Proceeds from exercise of common stock warrants........... 18,000 -- 3,392,959
Proceeds from exercise of common stock options............ 51,835 48,782 450,013
Proceeds from issuance of common stock under
Employee stock purchase plan............................ 26,996 3,976 4,500
----------- ----------- -----------
Net cash provided by financing activities.......... 36,097 7,440,729 5,073,046
----------- ----------- -----------
Effect of foreign exchange on Cash and Cash Equivalents... -- -- (9,021)
----------- ----------- -----------
(Decrease) Increase in Cash and Cash Equivalents............ (6,920,593) 1,465,373 (951,189)
Cash and Cash Equivalents, beginning of year................ 11,067,414 4,146,821 5,612,194
----------- ----------- -----------
Cash and Cash Equivalents, end of year...................... $ 4,146,821 $ 5,612,194 $ 4,661,005
----------- ----------- -----------
Cash paid during the year for interest...................... $ 28,479 $ 21,625 $ 18,822
=========== =========== ===========
In connection with the acquisition of ADL, the following
non-cash transactions occurred:
Fair value of assets acquired............................... $ 532,545
Goodwill.................................................... 268,453
Cash paid for acquisition costs, net of cash acquired....... (100,813)
-----------
Liabilities assumed....................................... $ 700,185
===========
Issuance of common stock for services to be provided........ $ 214,300
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
33
MATRITECH, INC.
NOTES TO CONSOLIDATED 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 a limited number of products, reliance on sole suppliers,
dependence on key individuals, competition from substitute products and larger
companies, the development of commercially usable products and the need to
obtain adequate additional financing necessary to fund the development of its
future products.
On June 28, 2000, the Company acquired all of the outstanding shares of
capital stock of ADL GmbH, Gesellschaft fur Allergie, Diagnostika und
Laborkonzepte ("ADL"), now called Matritech GmbH ("Matritech GmbH"), a European
distributor of diagnostic testing products, including the Company's NMP22 Test
Kit for bladder cancer (see Note 2).
(a) Revenue Recognition
The Company recognizes revenue from product sales upon shipment; revenue
from collaboration fees as milestones are achieved; revenue from nonrefundable
license agreements and research grants as earned. For each of the three years
presented in the accompanying statements of operations, substantially all of the
Company's revenue is from product sales.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition on Financial
Statements. SAB No. 101 requires 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, among other things. The Company believes that its revenue recognition
policies comply with SAB No. 101 and, therefore, the adoption of SAB No. 101 did
not have a material effect on its future or historically reported 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 follows the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, in accounting
for its marketable 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. Securities held at December 31, 1999 and 2000 include only
cash and cash equivalents, which consist of auction market preferred stocks and
money market accounts.
F-7
34
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Inventories
Inventories are stated at the lower of cost (determined on a first-in
first-out basis) or market and consist of the following:
DECEMBER 31,
--------------------
1999 2000
-------- --------
Raw materials.......................................... $179,316 $150,981
Work-in-process........................................ 1,464 1,796
Finished goods......................................... 120,117 181,750
-------- --------
$300,897 $334,527
======== ========
(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:
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -------------
Laboratory equipment................................. 5 to 10 years
Office equipment..................................... 5 years
Laboratory furniture................................. 5 years
Leasehold improvements............................... Life of lease
Automobiles.......................................... 5 years
The Company amortizes certain intangible assets, including license fees,
over their estimated useful lives of three to five years.
(d) Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of, which establishes
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived, identifiable
intangible assets and goodwill for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Any long-lived assets held for disposal are reported at the
lower of their carrying amounts or fair value less cost to sell. Based on its
review, management believes that the carrying value of the Company's long-lived
assets does not require any adjustment.
(f) Uses of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
35
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Concentration of Credit Risk and Significant Customers
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 nor any significant accounts receivable writeoffs to date.
The Company received revenue of greater than 10% of total product sales and
collaboration fees from the following number of customers during the following
periods:
CUSTOMER
-------------------------------
A B C D E
--- --- --- --- ---
Year ended December 31, 1998................. 2 -- 31% -- 29% --
Year ended December 31, 1999................. 2 30% 49% -- -- --
Year ended December 31, 2000................. 2 13% 18% -- -- --
The Company had accounts receivable balances greater than 10% of total accounts
receivable from the following customers as of December 31, 1999 and 2000:
CUSTOMER
-------------------------------
A B C D E
--- --- --- --- ---
As of December 31,
1999.................................................. 12% 47% 11% 19% --
2000.................................................. 17% 24% 14% -- 12%
(h) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and notes payable. The
carrying amounts of the Company's financial instruments approximate the
estimated fair value at December 31, 1999 and 2000. The estimated fair values
have been determined through information obtained from market sources and
management estimates.
(i) Net Loss per Common Share
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings per Share. Basic net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding during the
year. Diluted net loss per share is the same as basic loss per share as the
effects of the Company's potential common stock are antidilutive. Potential
common stock consists of stock options and warrants; and also at December 31,
2000, the 37,153 shares of common stock held in escrow in connection with the
ADL acquisition, as these shares are contingent upon future employment. The
number of antidilutive common stock equivalents were 1,649,391, 2,724,156 and
1,556,440 for the years ended December 31, 1998, 1999 and 2000, respectively.
(j) Comprehensive Income(Loss)
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
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.
During 2000, the Company incurred a translation loss of $9,021
F-9
36
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to Matritech GmbH. This loss, along with the fiscal 2000 reported net
loss, creates a comprehensive net loss for the year ended December 31, 2000 of
$6,845,275. The Company's comprehensive loss was the same as the reported net
loss for the years ended December 31, 1999 and 1998.
(k) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to current presentation. These classifications have no
effect on the Company's results of operations or financial position.
(2) ACQUISITION OF ADL
On June 28, 2000, the Company acquired all of the outstanding shares of
capital stock of ADL, now called Matritech GmbH, a European distributor of
diagnostic testing products, including the Company's NMP22 Test Kit for bladder
cancer. Matritech Gmbh is located in Freiburg, Germany. Pursuant to Accounting
Principles Board ("APB") Opinion No. 16, Business Combinations, this acquisition
was accounted for as a purchase, and accordingly the results of operations of
Matritech GmbH from June 28, 2000 forward are included in the Company's
consolidated statement of operations.
The aggregate purchase price of $801,000 consisted of assumed liabilities
of $700,000 and acquisition costs of $101,000. The purchase price was allocated
based upon the fair value of the tangible and intangible assets acquired. Total
tangible assets acquired were $533,000 comprised of current assets of $311,000,
net fixed assets of $201,000 and other assets of $21,000. Goodwill of $268,000
was recorded in connection with the acquisition and is being amortized ratably
over three years.
In connection with the acquisition, the Company issued 37,153 shares of the
Company's common stock to the former shareholders of ADL. These shares are
restricted subject to continued employment of the ADL shareholders. This
issuance of shares was valued at $214,300, and is being recorded ratably as
compensation over the three year employment period.
Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma combined results of operations of the
Company assume that the ADL acquisition was completed on January 1, 1999. These
proforma results represent the historical operating results of ADL prior to its
date of acquisition, combined with those of the Company with appropriate
adjustments. These pro forma results are not necessarily indicative of operating
results that would have occurred if the ADL acquisition had been operated by
current management during the periods presented.
YEAR ENDED
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Total revenue..................................... $ 2,567,024 $ 1,935,121
Net loss.......................................... $(6,536,615) $(7,069,385)
Net loss per share -- basic and diluted........... $ (.31) $ (.29)
(3) 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.
F-10
37
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net deferred tax asset consists of the following:
DECEMBER 31,
----------------------------
1999 2000
------------ ------------
Net operating loss carryforwards................ $ 15,428,000 $ 17,950,000
Capitalized research and development expenses... 4,006,000 4,297,000
Tax credits..................................... 1,952,000 2,117,000
Other temporary differences..................... (51,000) (73,000)
------------ ------------
Net deferred tax asset........................ 21,335,000 24,291,000
Valuation allowance............................. (21,335,000) (24,291,000)
------------ ------------
$ -- $ --
============ ============
A full valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax asset.
The net operating loss carryforwards and tax credits expire as follows:
STATE
FEDERAL NET NET OPERATING
OPERATING LOSS LOSS TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
- --------------- -------------- ------------- -------------
2001...................................... -- $ 3,986,000 --
2002...................................... -- 2,048,000 --
2003...................................... -- 3,925,000 --
2004...................................... -- 5,256,000 --
2005-2020................................. $43,217,000 10,712,000 $2,117,000
----------- ----------- ----------
$43,217,000 $25,927,000 $2,117,000
=========== =========== ==========
(4) LEASE COMMITMENTS
The Company leases office and laboratory facilities and certain equipment
under operating leases that expire through 2006. Total commitments are due as
follows:
2001..................................................... $ 504,000
2002..................................................... 491,000
2003..................................................... 484,000
2004..................................................... 470,000
2005..................................................... 468,000
Thereafter............................................... 5,000
----------
Total.................................................... $2,422,000
==========
Rent expense for the years ended December 31, 1998, 1999 and 2000 was
approximately $275,000, $283,000 and $341,000 respectively.
(5) NOTES PAYABLE
The Company has a term note with Phoenix Leasing Incorporated for equipment
purchases. The term note is payable over 48 months, bears interest at 11.75% and
is secured by the underlying equipment. Remaining payments under this note total
$64,000, with the final payment in October 2001.
F-11
38
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition of ADL, the Company assumed certain debt
obligations. At December 31, 2000, these obligations consist of a $131,000 loan
from a bank, a $48,000 third-party demand note and $25,000 worth of car loans.
The bank loan is due in June 2004, bears interest at 5.2% and is secured by
trade receivables and inventory. The demand note will be repaid by the Company
and the Company will be reimbursed by a key Matritech GmbH employee; the Company
has recorded a corresponding asset for this employee receivable. The car loans
bear interest between 6.99% and 7.50% and are due in monthly installments
totalling $1,000.
Maturies of debt obligations are as follows:
2001...................................................... $110,322
2002...................................................... 48,640
2003...................................................... 41,321
2004...................................................... 67,420
--------
Total..................................................... $267,703
========
(6) COMMON STOCK
(a) Sale of Common Stock
In April 1999, the Company completed a private placement of 3,094,965
shares of its common stock resulting in net proceeds of $3,910,000 after
deducting 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 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. All such warrants
were exercised during 2000, providing proceeds to the Company of $1,981,000.
In August 2000, the Company entered into a common stock purchase agreement
covering the sale of up to $30 million (a maximum of 2.45 million shares) of the
Company's common stock with Acqua Wellington North American Equities Fund, Ltd.
("Acqua"). Draw downs to purchase stock are initiated at the Company's sole
discretion, and the Company sets a minimum threshold price (not less than $3.00
per share) beneath which Acqua is not required to purchase. Draw downs are in
effect for 20 consecutive trading days after authorization by the Company, with
a maximum of 12 draw downs, each not to exceed $10 million, during the term of
the agreement. Shares are purchased at a discount (ranging from 3.0 - 4.5%
depending on the threshold price) to the market price at any time beginning in
August 2000 and ending in October 2001. If the Company has not requested draw
downs in the aggregate amount of $7.5 million by June 2001, the Company must pay
Acqua either $225,000 or issue warrants to purchase 112,500 shares. During 2000,
Acqua purchased 281,082 shares, with net proceeds to the Company of $1,476,000.
In February 2001, Acqua purchased 198,594 shares, with net proceeds to the
Company of $895,000.
(b) Warrants
In April 1997, the Company issued a warrant to an investor 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 as a
component of selling, general and administrative expense on the accompanying
statement of operations for the year ended December 31, 1998. In 1999, these
warrants were repriced to $2.50 per share and an additional $72,000 was recorded
as a component of selling, general and administrative expenses in 1999 for the
repricing. In 2000, all such warrants were exercised, providing proceeds to the
Company of $375,000.
F-12
39
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997, in connection with a private placement, the Company issued to
the placement agent a warrant to purchase 245,761 shares of common stock at $5
per share. In 1999, these warrants were repriced to $2.50 per share and $87,000
was recorded as a component of selling, general and administrative expenses in
1999 for the repricing. In 2000, 214,594 of these warrants were exercised,
providing proceeds to the Company of $536,000.
In July 2000, the Company issued a fully vested, nonforfeitable warrant to
an investor relations consultant for the purchase of up to 450,000 shares of the
Company's common stock for a price of $2.50 per share expiring in July 2005.
These warrants were valued at $2.0 million in accordance with SFAS No. 123 and
are being expensed ratably over the one-year term of the agreement. The Company
expensed $1.0 million as a component of selling, general and administrative
expense on the accompanying statement of operations for the year ended December
31, 2000. In December 2000, 200,000 of these warrants were exercised, providing
proceeds to the Company of $500,000.
(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.
There are 1,346,840 common shares available for future grants under
existing option plans at December 31, 2000. The following table summarizes stock
option activity:
WEIGHTED
NUMBER OPTION PRICE AVERAGE PRICE
OF OPTIONS PER SHARE PER SHARE
---------- -------------- ---------------
Options outstanding, December 31, 1997..... 1,046,945 $0.82 - $13.13 6.09
Granted.................................. 320,725 1.44 - 4.38 2.31
Exercised................................ (43,513) 0.82 - 4.00 1.19
Terminated............................... (114,997) 0.82 - 13.13 6.14
--------- -------------- -----
Options outstanding, December 31, 1998..... 1,209,160 1.37 - 13.13 5.31
Granted.................................. 472,670 0.84 - 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 0.84 - 13.13 4.47
Granted.................................. 124,206 1.16 - 7.88 4.54
Exercised................................ (188,204) 1.16 - 7.88 2.42
Terminated............................... (97,107) 1.16 - 13.13 7.10
--------- -------------- -----
Options outstanding, December 31, 2000..... 1,272,150 $0.84 - $13.13 $4.58
========= ============== =====
Options exercisable, December 31, 2000..... 827,348 $0.84 - $13.13 $5.76
========= ============== =====
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
========= ============== =====
F-13
40
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
- -------------- ----------- ----------- -------- ----------- --------
$ 0.84 - $ 1.34............. 162,950 8.54 $ 1.00 61,175 $ 1.04
1.44 - 2.69............. 402,030 7.11 1.89 207,543 1.96
3.31 - 4.00............. 168,261 8.31 3.57 55,171 3.78
5.00 - 6.69............. 62,575 8.85 6.25 27,125 6.20
7.88 - 8.06............. 446,034 5.94 7.89 446,034 7.89
10.63 - 13.13............. 30,300 5.37 13.10 30,300 13.10
--------- ---- ------ ------- ------
Total............. 1,272,150 7.09 $ 4.58 827,348 $ 5.76
========= ==== ====== ======= ======
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, 1999 and 2000,
the Company has accumulated payroll deductions of $4,500 and $21,402,
respectively, for the issuance of 3,000 and 6,572 shares of common stock,
respectively, which are issued in the following year to employees pursuant to
the plan. At December 31, 2000, 180,703 shares are available for issuance under
the plan.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of 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 APB 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 1998, 1999 and 2000 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 1998, 1999 and 2000
are as follows:
1998 1999 2000
------------- ------------- -------------
Risk-free interest rate............... 4.65% - 5.56% 4.65% - 6.38% 5.28% - 6.33%
Expected dividend yield............... -- -- --
Expected life......................... 7 years 7 years 7 years
Expected volatility................... 65% 65% 65%
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 1998, 1999 and 2000 was
computed as approximately $504,000, $530,000 and $396,000, respectively, and the
weighted average fair value of grants was $1.57, $1.12, and $3.19 per share for
1998, 1999 and 2000, respectively. The total pro forma compensation expense
(which includes amounts related to prior years' grants) for 1998, 1999 and 2000
was computed as approximately $1,143,000, $1,140,000 and $1,016,000,
respectively. The remaining amount, approximately $745,000, would be amortized
over the remaining vesting period of the underlying options. The resulting pro
forma
F-14
41
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998,
1999 and 2000 is as follows:
1998
--------------------------
AS REPORTED PRO FORMA
----------- -----------
Net loss.......................................... $(7,535,524) $(8,678,197)
=========== ===========
Basic and diluted net loss per share.............. $ (0.40) $ (0.47)
=========== ===========
1999
--------------------------
AS REPORTED PRO FORMA
----------- -----------
Net loss.......................................... $(6,124,216) $(7,264,040)
=========== ===========
Basic and diluted net loss per share.............. $ (0.29) $ (0.34)
=========== ===========
2000
--------------------------
AS REPORTED PRO FORMA
----------- -----------
Net loss.......................................... $(6,836,254) $(7,851,876)
=========== ===========
Basic and diluted net loss per share.............. $ (0.28) $ (0.32)
=========== ===========
(d) Reserved Shares
As of December 31, 2000, the following shares of common stock were reserved
and available for future issuance:
Stock Option Plans........................................ 2,618,990
1992 Employee Stock Purchase Plan......................... 180,703
Exercise of warrants outstanding.......................... 275,637
---------
3,075,330
=========
(7) LICENSE AGREEMENTS
(a) MIT License Agreement
MIT has granted the Company a worldwide exclusive license to certain
technology, which was extended when the Company obtained Food and Drug
Administration 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 $17,776, $6,944 and $12,510 in royalties in the
years ended December 31, 1998, 1999 and 2000.
(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
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42
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $25,000, $42,540 and $25,000 in royalties in the years ending
December 31, 1998, 1999 and 2000, respectively.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
--------------------
1999 2000
-------- --------
Payroll and related costs.............................. $165,389 $143,162
Professional fees...................................... 164,377 116,207
Royalties.............................................. 12,882 13,698
Clinical trials costs.................................. 78,119 70,731
Marketing expenses..................................... 28,035 --
Other.................................................. 87,943 23,676
-------- --------
$536,745 $367,474
======== ========
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company applies SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker or decision making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS No. 131, is a combination of the Chief Executive
Officer, President and the Chief Financial Officer. To date, the Company has
viewed its operations and manages its business as principally one segment, the
sale of diagnostic products. Associated services are not significant. As a
result, the financial information disclosed herein, represents all of the
material financial information related to the principal operating segment. All
of the Company's products were shipped from its facilities located in the United
States or, since June 28, 2000, from its facilities in Freiburg, Germany.
Product sales by destination are as follows:
REVENUE ($ IN 000'S)
-------------------------------------------
1998 1999 2000
----------- ----------- -------------
$ % $ % $ %
---- --- ---- --- ------ ---
United States.................................. $465 52% $330 53% $ 240 19%
Japan.......................................... 54 6 187 30 156 13
Europe......................................... 322 36 25 4 707 57
Rest of world.................................. 54 6 81 13 143 11
---- --- ---- --- ------ ---
Total.......................................... $895 100% $623 100% $1,246 100%
==== === ==== === ====== ===
The Company's total net fixed assets in the United States and Germany were
$604,000 and $177,000 at December 31, 2000, respectively; at December 31, 1999,
all of the Company's fixed assets were in the United States.
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43
MATRITECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUPPLEMENTAL FINANCIAL DISCLOSURE
UNAUDITED ($ IN 000'S, EXCEPT PER SHARE AMOUNTS) Q1-00 Q2-00 Q3-00 Q4-00
- ------------------------------------------------ ------- ------- ------- -------
Revenue............................................. $ 140 $ 190 $ 446 $ 470
Operating loss...................................... (1,379) (1,363) (2,331) (2,090)
Net loss............................................ (1,305) (1,257) (2,253) (2,021)
Basic/diluted net loss per share.................... $ (0.05) $ (0.05) $ (0.09) $ (0.08)
UNAUDITED ($ IN 000'S, EXCEPT PER SHARE AMOUNTS) Q1-99 Q2-99 Q3-99 Q4-99
- ------------------------------------------------ ------- ------- ------- -------
Revenue............................................. $ 170 $ 150 $ 130 $ 173
Operating loss...................................... (1,697) (1,594) (1,530) (1,506)
Net loss............................................ (1,668) (1,535) (1,481) (1,440)
Basic/diluted net loss per share.................... $ (0.09) $ (0.07) $ (0.07) $ (0.06)
F-17