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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
  OR o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
  Commission file number: 001-12128 Matritech, Inc.   Delaware
    
    04-2985132(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 330 Nevada Street, Newton, Massachusetts 02460    (617) 928-0820    Indicate by check mark whether the registrant:(1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). o Yes þ No As of May 1, 2005, there were 43,911,431 shares of the Registrants Common Stock
outstanding.




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MATRITECH, INC. INDEX PagePART I
    
    
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of December 31, 2004
and March 31, 2005
    
    
    3Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2005
    
    
    4Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 6.
    
    Exhibits
    
    
    29SIGNATURES


30EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. MATRITECH, INC. 
 CONSOLIDATED BALANCE SHEETS
(UNAUDITED) December 31,
    
    
    March 31,2004
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,906,178
    
    
    $
    7,834,088Accounts receivable less allowance of $85,123 in 2004 and $110,395 in 2005
    
    
    884,057
    
    
    
    785,149Inventories, net
    
    
    878,804
    
    
    
    779,732Prepaid expenses and other current assets
    
    
    347,245
    
    
    
    346,531Total current assets
    
    
    7,016,284
    
    
    
    9,745,500Property and equipment, net
    
    
    914,577
    
    
    
    917,517Goodwill
    
    
    132,615
    
    
    
    132,615Other assets
    
    
    166,416
    
    
    
    205,572Receivable from related party
    
    
    16,104
    
    
    
    9,657Total assets
    
    $
    8,245,996
    
    
    $
    11,010,861LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of notes payable
    
    $
    13,534
    
    
    $
    12,966Current maturities of convertible debt
    
    
    1,390,887
    
    
    
    1,139,911Accounts payable
    
    
    475,342
    
    
    
    471,059Accrued expenses
    
    
    1,570,588
    
    
    
    1,191,879Deferred revenue
    
    
    386,188
    
    
    
    338,496Total current liabilities
    
    
    3,836,539
    
    
    
    3,154,311Notes payable, less current maturities
    
    
    13,534
    
    
    
    12,966Convertible debt, less current maturities
    
    
    364,236
    
    
    
    80,179Deferred revenue
    
    
    636,775
    
    
    
    646,203Other long term liabilities
    
    
    
    
    
    
    39,615Warrants
    
    
    
    
    
    
    3,179,541Total liabilities
    
    
    4,851,084
    
    
    
    7,112,815Commitments and ContingenciesSeries A Convertible Preferred Stock, $1.00 par valueAuthorized  4,000,000 sharesIssued and outstanding  no shares in 2004 and 670,272 in 2005
    
    
    
    
    
    
    869,318
    
    
    
    869,318Stockholders Equity:Common stock, $0.01 par valueAuthorized90,000,000 shares in 2004 and 2005Issued and outstanding43,014,543 shares in 2004 and 43,718,512 shares in 2005
    
    
    430,145
    
    
    
    437,184Additional paid-in capital
    
    
    92,944,400
    
    
    
    94,676,356Accumulated other comprehensive income
    
    
    142,399
    
    
    
    132,617Accumulated deficit
    
    
    (90,122,032
    )
    
    
    (92,217,429
    )Total stockholders equity
    
    
    3,394,912
    
    
    
    3,028,728Total liabilities and stockholders equity
    
    $
    8,245,996
    
    
    $
    11,010,861
 The accompanying notes are an integral part of these consolidated financial statements. 3




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MATRITECH, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months EndedMarch 31,2004
    
    
    2005Revenue:Product sales, net of allowances
    
    $
    1,385,672
    
    
    $
    2,143,184Alliance and collaboration revenue
    
    
    47,955
    
    
    
    30,685Total revenue
    
    
    1,433,627
    
    
    
    2,173,869Expenses:Cost of product sales
    
    
    539,376
    
    
    
    718,025Research, development and clinical expense
    
    
    715,446
    
    
    
    729,750Selling, general and administrative expense
    
    
    2,268,995
    
    
    
    2,891,520Total operating expenses
    
    
    3,523,817
    
    
    
    4,339,295Loss from operations
    
    
    (2,090,190
    )
    
    
    (2,165,426
    )Interest income
    
    
    19,958
    
    
    
    27,375Interest expense
    
    
    (622,012
    )
    
    
    (671,650
    )Mark to market adjustment from warrants
    
    
    
    
    
    
    714,304Net loss
    
    $
    (2,692,244
    )
    
    $
    (2,095,397
    )Beneficial conversion feature related to series A convertible
preferred stock
    
    
    
    
    
    
    (1,627,232
    )Net loss attributable to common shareholders
    
    $
    (2,692,244
    )
    
    $
    (3,722,629
    )Basic and diluted net loss per common share
    
    $
    (0.07
    )
    
    $
    (0.09
    )Basic and diluted weighted average number of common shares outstanding
    
    
    36,715,762
    
    
    
    43,467,499
 The accompanying notes are an integral part of these consolidated financial statements. 4




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MATRITECH, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months EndedMarch 31,2004
    
    

2005Cash Flows from Operating Activities:Net loss
    
    $
    (2,692,244
    )
    
    $
    (2,095,397
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    54,945
    
    
    
    57,936Amortization of debt discount
    
    
    445,729
    
    
    
    483,916Amortization of deferred charges
    
    
    59,003
    
    
    
    39,106Issuance of common stock for interest on debt
    
    
    98,687
    
    
    
    62,866Noncash interest expense
    
    
    14,373
    
    
    
    88,828Mark to market adjustment on warrants
    
    
    
    
    
    
    (714,304
    )Changes in assets and liabilities:Accounts receivable
    
    
    (256,533
    )
    
    
    94,880Inventories
    
    
    84,524
    
    
    
    76,771Prepaid expenses and other assets
    
    
    (42,964
    )
    
    
    (77,548
    )Accounts payable
    
    
    42,049
    
    
    
    (676
    )Accrued expenses and other liabilities
    
    
    114,490
    
    
    
    (319,338
    )Deferred revenue
    
    
    (7,952
    )
    
    
    (38,264
    )Net cash used in operating activities
    
    
    (2,085,893
    )
    
    
    (2,341,224
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (31,692
    )
    
    
    (66,476
    )Net cash used in investing activities
    
    
    (31,692
    )
    
    
    (66,476
    )Cash Flows from Financing Activities:Payments on notes payable
    
    
    (38,751
    )
    
    
    Proceeds from sale of preferred stock and warrants, net
    
    
    
    
    
    
    5,325,289Proceeds from sale of common stock and warrants, net
    
    
    5,846,969
    
    
    
    Proceeds from issuance of common stock under employee stock purchase plan
    
    
    5,250
    
    
    
    6,226Net cash provided by financing activities
    
    
    5,813,468
    
    
    
    5,331,515Effect of foreign exchange on cash and cash equivalents
    
    
    (7,869
    )
    
    
    4,095Increase in cash and cash equivalents
    
    
    3,688,014
    
    
    
    2,927,910Cash and cash equivalents, beginning of period
    
    
    7,518,124
    
    
    
    4,906,178Cash and cash equivalents, end of period
    
    $
    11,206,138
    
    
    $
    7,834,088Supplemental Cash Flow Information:Cash paid during the year for interest
    
    $
    4,221
    
    
    $
    540Issuance of common stock as payment on debt
    
    
    172,649
    
    
    
    697,743
 The accompanying notes are an integral part of these consolidated financial statements. 5




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MATRITECH, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Basis of Presentation The quarterly consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and include, in the opinion of management, all adjustments, consisting of
normal, recurring adjustments necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The results for the interim periods
presented are not necessarily indicative of results to be expected for any future period. These
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004 filed with the SEC (File No. 001-12128). We have incurred losses from operations since our inception. We have an accumulated deficit
of $92 million at March 31, 2005. Based on our current rate of cash utilization, our cash at March
31, 2005 is expected to fund operations through at least December 31, 2005, provided we pay
interest and principal on our convertible debentures in stock. We will, as we deem necessary or
prudent, continue to seek to raise additional capital and will consider various financing
alternatives, including equity or debt financings convertible into equity and corporate partnering
arrangements. However, we may not be able to raise needed capital on terms that are acceptable to
us, or at all. If we raise funds on unfavorable terms, we may provide rights and preferences to
new investors which are not available to current shareholders. In addition, our existing financing
arrangements contain anti-dilutive provisions which may require us to issue additional securities
if certain conditions are met. If we do not receive additional financing or do not receive an
adequate amount of additional financing, we will be required to curtail our expenses by reducing
research and/or marketing or by taking other steps that could hurt our future performance,
including but not limited to, the premature sale of some or all of our assets or product lines on
undesirable terms, merger with or acquisition by another company on unsatisfactory terms or the
cessation of operations. Any future equity financings or retirements of debt with common stock
will dilute the ownership interest of our existing investors and may have an adverse impact on the
price of our common stock. Any of the foregoing steps may have a material adverse effect on our
business, financial condition and results of operations. There can be no assurance that capital
will be available on terms acceptable to us, if at all. 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of Matritech, Inc., a Delaware
corporation, and our wholly-owned subsidiary, Matritech GmbH, based in Freiburg, Germany. All
intercompany balances and transactions have been eliminated at consolidation level. (b) 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,
    
    
    March 31,2004
    
    
    2005Raw materials
    
    $
    169,708
    
    
    $
    185,762Work-in-process
    
    
    7,975
    
    
    
    17,276Finished goods
    
    
    655,739
    
    
    
    537,796Consignment inventory
    
    
    45,382
    
    
    
    38,898$
    878,804
    
    
    $
    779,732
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(c) Revenue Recognition Deferred revenue consists of the following: December
31, 2004
    
    

March
31, 2005Collaboration fees
    
    $
    737,885
    
    
    $
    733,700Deferred product revenue
    
    
    285,078
    
    
    
    250,999$
    1,022,963
    
    
    $
    984,699
 (d) Comprehensive Loss Comprehensive loss is comprised of net loss and certain changes in stockholders equity that
are excluded from net loss. The Company includes in other comprehensive loss those foreign
currency adjustments related to the translation of the assets and liabilities of Matritech GmbH
into U.S. Dollars as the functional currency of Matritech GmbH is the euro. The composition of
comprehensive loss is as follows: Three Months EndedMarch 31,2004
    
    
    2005Net loss
    
    $
    (2,692,244
    )
    
    $
    (2,095,397
    )Other comprehensive lossForeign currency translation adjustments
    
    
    (8,537
    )
    
    
    (9,782
    )Comprehensive loss
    
    $
    (2,700,781
    )
    
    $
    (2,105,179
    )
 (e) Stock-Based Compensation We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees(APB 25) and related interpretations, in accounting for our stock-based
compensation plans, rather than the alternative fair value accounting method provided for under
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation,(SFAS No. 123). In accordance with Emerging Issues Task Force (EITF) Issue No.
96-18, we record compensation expense equal to the fair value of options granted to non-employees
over the vesting period, which is generally the period of service. The following table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation: Three Months EndedMarch 31,2004
    
    
    2005Net loss attributable to common shareholders
    
    $
    (2,692,244
    )
    
    $
    (3,722,629
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (197,379
    )
    
    
    (179,162
    )Pro forma net loss
    
    $
    (2,889,623
    )
    
    $
    (3,901,791
    )Net loss per common share:Basic and diluted  as reported
    
    $
    (0.07
    )
    
    $
    (0.09
    )Basic and diluted  pro forma
    
    $
    (0.08
    )
    
    $
    (0.09
    )
 7




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The fair value of stock options and common shares issued pursuant to the stock
option and stock purchase plans at the date of grant were estimated using the Black-Scholes model
with the following weighted-average assumptions: Three Months EndedMarch 31,2004
    
    
    2005Risk-free interest rate
    
    
    3.744.19
    %
    
    
    3.694.00
    %Expected dividend yield
    
    
    
    
    
    
    Expected life
    
    5 years
    
    5 yearsExpected volatility
    
    
    85
    %
    
    
    85
    %
 (f) Net Loss per Common Share We compute earnings per share in accordance with SFAS No. 128, Earnings per Share. Basic net
loss per common share is computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the year. Diluted loss per share is
the same as basic loss per share as the effects of our potential common stock equivalents are
anti-dilutive. At March 31, 2004, potential common stock equivalents consisted of stock options,
warrants, and convertible debentures. At March 31, 2005, potential common stock equivalents
consisted of stock options, warrants, convertible debentures and Series A Convertible Preferred
Stock. The number of anti-dilutive securities excluded from the computation of diluted loss per
share were 10,646,081 and 22,667,729 for the periods ended March 31, 2004 and 2005, respectively. 3. Stockholders Equity On March 4, 2005, we entered into a purchase agreement (the Purchase Agreement) which
provides for the sale through a Private Placement of an aggregate of 1,426,124 shares of our Series
A Convertible Preferred Stock, par value $1.00 per share (the Series A Preferred Stock) and the
issuance to the investors of warrants to purchase 4,991,434 shares of our common stock at a price
of $1.47 per share (the 2005 Warrants). Each share of our Series A Preferred Stock is
convertible into ten shares of our common stock (the Conversion Shares). The Purchase Agreement
provides for two closings (the First Closing and the Second Closing) because we cannot issue
all shares of the Series A Preferred Stock that we have agreed to sell without obtaining
stockholder approval because the resulting Conversion Shares would exceed 20% of our outstanding
common stock. The table below provides highlights of the Private Placement including the First Closing which
has occurred and the Second Closing which is subject to stockholder approval. Shares ofStockholder
    
    
    
    
    
    
    Series AApproval
    
    
    
    
    
    
    Preferred
    
    
    Conversion
    
    
    2005
    
    
    TotalNeeded
    
    
    Status
    
    
    Stock
    
    
    Shares
    
    
    Warrants
    
    
    ConsiderationFirst Closing
    
    
    
    
    
    CompletedNo
    
    March 2005
    
    
    670,272
    
    
    
    6,702,720
    
    
    
    4,991,434
    
    
    $
    5,898,394Second Closing
    
    
    
    
    
    If Approved,Yes
    
    May 2005
    
    
    755,852
    
    
    
    7,558,520
    
    
    
    0
    
    
    $
    6,651,498
 On March 4, 2005, we completed the First Closing which consisted of 670,272 shares of Series A
Preferred Stock and the 2005 Warrants to purchase 4,991,434 shares of our common stock, for an
aggregate consideration of $5,898,394 (before cash commissions and expenses of approximately
$573,000). In addition, we issued warrants to a placement agent for a total of 656,920 shares of
common stock (with a value of approximately $562,000). Both the 2005 Warrants and the placement
agent warrants have an exercise price of $1.47 per share, become exercisable on September 5, 2005
and expire on March 4, 2010. Each share of Series A Preferred Stock is convertible into ten shares
of our common stock, which equates to a conversion price of $ .88 per share of common stock. This
conversion price and the exercise price of the warrants are subject to adjustment in the event of
subsequent dilutive issuances. The holders of Series A Preferred Stock are entitled to a
liquidation preference and have the benefit of covenants of the Company not to liquidate, merge,
sell control or substantially all its assets, issue debt or senior equity securities, or amend the
charter in any way adverse to the holders. We are obligated not to issue other securities that
would be senior to the Series A Preferred Stock, not to incur indebtedness in excess of $2,000,000
except in limited forms, and not to enter into or consummate a transaction which would result in
the holders of all the voting power of our outstanding 8




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capital stock having less than a majority of voting power of a surviving entity after a
merger, consolidation, share exchange or sale. We are further required to reserve sufficient
shares of common stock for issuance of the Conversion Shares and the Warrant Shares and to list
such common shares with the American Stock Exchange. We will seek stockholder approval of this financing transaction at our Annual Meeting of
Stockholders to be held on May 25, 2005 or such other date to which such meeting may be adjourned.
Under the Purchase Agreement and under American Stock Exchange Rule 713, we need stockholder
approval to sell additional shares of Series A Preferred Stock. Stockholder approval is also
necessary to enable us to issue more Conversion Shares at a conversion price below the current
conversion floor of $.70 per share or to issue shares upon exercise of the warrants at an exercise
price below $1.34 per share if the anti-dilution provisions to which we have agreed are triggered. If stockholder approval is received, we intend to complete a second closing for the sale of an
additional 755,852 shares of Series A Preferred Stock for an aggregate consideration of $6,651,498
(before cash commissions and expenses), and will issue additional five year placement agent
warrants for a further 740,796 shares of common stock at an exercise price of $1.47 per share. The net cash proceeds of $5,325,000 from the First Closing, further reduced by the fair value
of the placement agent warrants totaling $562,000, were allocated between the Series A Preferred
Stock (approximately $869,000) and the 2005 Warrants (approximately $3,894,000). In this
allocation, the 2005 Warrants are recorded as a liability at their fair value as set forth below
and the Series A Preferred Stock is allocated the remaining balance of the net proceeds. The value
of the 2005 Warrants was calculated using the Black-Scholes pricing model with the following
assumptions: dividend yield of zero percent; expected volatility of 85%; risk free interest rate
of approximately 4% and a term of five years. In connection with the issuance of the Series A Preferred Stock, we recorded a beneficial
conversion feature of $1,627,000. A beneficial conversion feature is recorded when the
consideration allocated to the convertible security, divided by the number of common shares into
which the security converts, is below the fair value of the common stock into which the Series A
Preferred Stock can convert at the date of issuance. The amount of the beneficial conversion
feature has been immediately accreted as a deemed dividend because the preferred stock is
immediately convertible. The value of the beneficial conversion feature has been reflected as an
adjustment to the net loss attributable to common shareholders on our Consolidated Statement of
Operations. As part of the Private Placement, we entered into a Registration Rights Agreement committing
to timely file a registration statement covering the resale of the Conversion Shares and the shares
for which the 2005 Warrants may be exercised (the Warrant Shares). If we fail to timely file a
registration statement, if the registration statement is not declared effective within certain time
limits or if the registration statement does not remain effective, we are obligated to pay
liquidated damages in an amount equal to 1.5% of the consideration paid for the Series A Preferred
Stock for each thirty day period during which the failure persists. In accordance with
Emerging Issues Task Force (EITF) 00-19, Accounting for Derivative Financial Instruments Indexed
To, and Potentially Settled in a Companys Own Stock,(EITF 00-19), a transaction which includes
a potential for net-cash settlement, including liquidated damages, requires that derivative
financial instruments, including warrants, be recorded at fair value as a liability and that
subsequent changes in fair value be reflected in the statement of operations. We concluded that
the Registration Rights Agreement liquidated damages provision applicable to the Warrant Shares
meets the definition of net cash settlement under EITF 00-19. In accordance with EITF 00-19, the
fair value of the warrants of $4,271,000 was accounted for as a liability at
March 4, the date of the First Closing, and the subsequent
changes in the fair value of the 2005
Warrants as of March 31 (approximately $1,091,000) are reflected on our Consolidated Statement of
Operations as mark to market warrant adjustments. Transaction costs
of $377,000 were allocated to the warrants and expensed upon closing
of the transaction, offsetting subsequent mark to market warrant
adjustments. On April 18, 2005, we amended the Registration Rights Agreement to eliminate any liquidated
damage provision with respect to a failure to maintain the effectiveness of a registration
statement covering resale of the Warrant Shares. On May 9, 2005 the registration statement
covering resale of the Warrant Shares became effective and the 2005 Warrants were reclassified as
equity because there is no future potential for a net-cash settlement with regard to the 2005
Warrants. The resulting mark to market adjustments and the reclassification of the 2005 Warrants
will be presented in the Companys financial statements for the quarter ending June 30, 2005. This sale has been deemed to be a dilutive issuance under the terms of our Convertible
Debentures and our March 2003 Warrants. As a result, as of March 4, 2005, the Convertible
Debentures are currently exercisable into 2,525,253 shares of our common stock at a price of $ .99
per share, representing a current increase of 869,623 shares from the conversion terms of the
Debentures at December 31, 2004, and the March 2003 Warrants are exercisable to purchase shares of
our common stock at a price of $ .88 per share. We have calculated an additional beneficial
conversion charge totaling approximately $442,000 which are being recorded as a debt discount in
the first quarter of 2005 and amortized over the remaining life of the Debentures. 9




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4. Convertible Debt A summary of the Convertible Debt accounting is as follows: Proceeds at closing in March 2003
    
    $
    5,000,000Less:Fair value ascribed to the warrants and recorded as debt discount
    
    
    (950,000
    )Fair value ascribed to placement agent warrant and recorded as debt discount
    
    
    (131,000
    )Beneficial conversion feature calculated on date of closing and recorded as
debt discount
    
    
    (199,000
    )Additional beneficial conversion feature recorded in the fourth quarter of
2003 as debt discount
    
    
    (1,497,000
    )Additional beneficial conversion feature recorded in the first quarter of
2004 as debt discount
    
    
    (1,339,000
    )Additional beneficial conversion feature recorded in the first quarter of
2005 as debt discount
    
    
    (442,000
    )Cumulative principal payments made in stock
    
    
    (2,500,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    3,278,000Balance, March 31, 2005
    
    $
    1,220,000
 The debt discount is being amortized to interest expense using the effective interest method
over the term of the debt. For the three month periods ended March 31, 2004 and 2005, $446,000 and
$484,000, respectively, representing amortization of these costs is included in interest expense. Debt issuance costs attributable to the Convertible Debentures, which totaled approximately
$475,000, have been capitalized as other assets and other current assets on the consolidated
balance sheet and are being amortized based on the effective interest method over the term of the
debt. For the three month periods ended March 31, 2004 and 2005, $59,000 and $39,000, respectively
representing amortization of these costs is included in interest expense. As of March 31, 2004 and
2005, unamortized debt issuance costs totaled $270,000 and $80,000, of which $191,000 and $80,000
is included in other current assets, respectively. Minimum future payments on the debt are as follows: 2005
    
    $
    1,833,0002006
    
    
    776,000Total payments
    
    
    2,609,000Less: Portion related to periodic interest payments
    
    
    (109,000
    )Non-cash interest related to debt discount
    
    
    (1,280,000
    )Balance, March 31, 2005
    
    
    1,220,000Less current portion
    
    
    1,140,000Long-term portion
    
    $
    80,000
 The fair value of the Convertible Debt at March 31, 2005 as estimated by management is
approximately $2.3 million. The carrying value of the Convertible Debt in the Companys financial
statements reflects discounts related to beneficial conversion charges calculated in accordance
with EITF Issue No. 00-27. The Convertible Debentures allow the interest and principal to be paid in common stock at a
discount to value, but only if (i) we are not in default under the terms of the Convertible
Debentures, (ii) there is an effective registration statement covering such shares, (iii) our
common stock is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq National
Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our election to make
payments in stock 10




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##### Table of Contents



and have made payment of all other amounts then due under the Convertible Debentures, (v) the
issuance of such shares would not cause the holders to own more than 9.999% of the outstanding
shares of our common stock, (vi) no public announcement of a change of control or other
reclassification transaction has been made and (vii) we have sufficient authorized but unissued and
unreserved shares to satisfy all share issuance obligations under the March 2003 financing. The
$54,000 interest payment for the first quarter of 2005 was made in stock and the January, February
and March, 2005 principal repayments of $192,000 each were made in stock and, unless a default
occurs, the remaining payments scheduled for both interest and principal are expected to be made in
stock. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q, our other reports and communications to our
securityholders, as well as oral statements made by our 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, our future
revenue, operating income and the plans and objectives of management. In particular, certain
statements contained in Managements Discussion and Analysis of Financial Condition and Results of
Operations, including 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 our other reports
filed with the SEC. Overview Currently, our most important source of revenue and revenue growth are our NMP22 products
developed by our scientists and based upon our proprietary NMP technology. After eight consecutive
quarters of increasing NMP22 product sales, our sales of those products decreased in the first
quarter compared to the fourth quarter of 2004. The decrease resulted primarily from sales force
customer focus and field management issues with our direct-to-the-physician sales staff, as well as
quarter-to-quarter variations in reported revenues from distributors. We do not believe this
decrease reflects any trend or any seasonal aspect of our business. We continue to distribute
allergy and other diagnostic products for a variety of third parties in Europe, but revenues from
these products have generally been decreasing as a percentage of our revenues. Selling, general and administrative expenses, or SG&A, continue to increase as a result of the
higher costs needed to support the direct distribution of the NMP22 BladderChek Tests. The
increased selling expenditures will likely increase our losses in the short term (see Results of
Operations below), but our goal is to generate sufficient additional gross profit from sales
growth to cover our increased selling expenses and achieve our goal of profitability. In addition,
because the financial future of Matritech is so closely related to increasing the sales of NMP22
BladderChek Tests, we are taking steps to ensure we can meet anticipated demand for these devices
in the future. We are continuing our collaboration with Sysmex Corporation, a leading manufacturer of
automated laboratory instruments based in Kobe, Japan, in the field of cervical sample testing. We
are also continuing the development of our core diagnostic technology in breast cancer. We measure
our progress in such programs by achievements such as entering into new strategic partnerships or
alliances (see Agreements below), obtaining positive clinical trial results (see Products), and
ultimately securing regulatory approvals such as our four FDA approvals for NMP22 products. If we
can successfully leverage our strategic partnerships, we expect to meet our goal of limiting the
increase in our own annual research and development expenditures to less than 20% per year over the
next few years. Research and development expenditures were 2% higher in the first quarter of 2005
than for the same period in 2004. We have been unprofitable since inception and expect to incur significant additional operating
losses for at least the next few years. For the period from inception to March 31, 2005, we
incurred a cumulative net loss of approximately $92 million. To provide funds to support our new
direct sales force and our ongoing research and development efforts, we raised additional capital
in 2004 and in March 2005 as we have in past years. A failure to adequately finance the company
could have a material adverse impact on our ability to achieve our objectives. Success in raising
equity to fund the cost of these product distribution and development programs is an important
element of our strategy. 11




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##### Table of Contents



Results of Operations Quarter Ended March 31, 2004 (Q1 2004) Compared with Quarter Ended March 31, 2005 (Q1
2005) Revenues Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    734,000
    
    
    $
    1,478,000
    
    
    $
    744,000
    
    
    
    101
    %NMP22 Lab Test Kit Sales
    
    
    195,000
    
    
    
    187,000
    
    
    
    (8,000
    )
    
    
    (4
    %)Other Product Sales
    
    
    457,000
    
    
    
    478,000
    
    
    
    21,000
    
    
    
    5
    %Total Product Sales
    
    
    1,386,000
    
    
    
    2,143,000
    
    
    
    757,000
    
    
    
    55
    %Alliance and Collaboration Revenue
    
    
    48,000
    
    
    
    31,000
    
    
    
    (17,000
    )
    
    
    (35
    %)Total Revenue
    
    $
    1,434,000
    
    
    $
    2,174,000
    
    
    $
    740,000
    
    
    
    52
    %
 The increase in revenue from our NMP22 product line is due to a $697,000 sales increase,
primarily in the U.S. and Europe, and a $39,000 favorable exchange rate impact. BladderChek Test
sales accounted for approximately 89% of sales in the NMP22 product line in the first quarter of
2005, compared to 79% in the first quarter of 2004. The BladderChek Test sales growth is the
result of increased selling efforts, principally through initiating a direct-to-the-doctor selling
effort in the United States in the fourth quarter of 2003, continuing our direct-to-the-doctor
selling activity in Germany and obtaining additional reimbursement coverage by Medicare and other
health plan insurance payors throughout the United States. We include in the category of Lab Test
Kit sales the sale by Diagnostic Products Corporation (DPC) of a fully automated laboratory test
incorporating our NMP22 technology that DPC manufactures for use on its automated laboratory
analyzers. The increase in revenue from our non-NMP22 products is due to a favorable exchange rate
impact. Alliance and collaboration revenue decreased by $17,000 principally because the amortization
of prepaid marketing fees for a distribution agreement ended in 2004. During the first quarter of 2005 we sold approximately $35,000 of the BladderChek Test to
distributors for which we did not have sufficient history to estimate returns. Accordingly, this
amount is recorded as deferred revenue at March 31, 2005, and will be recognized as revenue when
the distributor reports to us that it has either shipped or disposed of the devices (indicating
that the possibility of return is remote), or when we are able to reasonably estimate and reserve
for returns. BladderChek Test revenue in the fourth quarter of 2004 included
approximately $60,000 of previously deferred revenue resulting from the termination of our
distribution agreement with Cytogen as well as $80,000 of revenue recognized for products shipped
to a number of distributors in 2002, which were no longer considered at risk for return given their
expired shelf life. During the first quarter we evaluated our distributor return history and determined that we
have sufficient history to estimate product returns for many of our distributors and therefore are
now recognizing revenue when we ship BladderChek Tests to these distributors. We have also
recognized all deferred revenue relating to BladderChek Test shipments to these distributors at
March 31, 2005. This has resulted in our recognizing $70,000 of BladderChek Test shipments to
distributors, which previously would have been recorded as deferred revenue. As of March 31, 2005
our deferred product revenue balance totaling $251,000 includes approximately $166,000 of deferred
BladderChek Test revenue for distributors for which we do not have sufficient history to estimate
returns. The balance is related to a distributor order which was prepaid but not yet shipped. Deferred revenue consists of the following: March 31, 2004
    
    

March 31, 2005
    
    

    $ Change
    
    % ChangeCollaboration fees
    
    $
    805,000
    
    
    $
    734,000
    
    
    $
    (71,000
    )
    
    
    (9
    %)Deferred product revenue
    
    
    355,000
    
    
    
    251,000
    
    
    
    (104,000
    )
    
    
    (29
    %)$
    1,160,000
    
    
    $
    985,000
    
    
    $
    (175,000
    )
    
    
    (15
    %)
 Cost of Product Sales Q1 2004
    
    
    Q1 2005
    
    

$ Change
    
    
    % ChangeProduct Sales
    
    $
    1,386,000
    
    
    $
    2,143,000
    
    
    $
    757,000
    
    
    
    55
    %Cost of Product Sales
    
    
    539,000
    
    
    
    718,000
    
    
    
    179,000
    
    
    
    33
    %Gross Profit
    
    $
    847,000
    
    
    $
    1,425,000
    
    
    $
    578,000
    
    
    
    68
    %Gross Profit Margin
    
    
    61
    %
    
    
    66
    %
 12




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##### Table of Contents



The decrease in cost of product sales on a percentage basis and the increase in our gross
profit margin is largely the result of increased sales of higher margin NMP22 products worldwide as
a percentage of total sales. Research and Development and Clinical Expenses Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    715,000
    
    
    $
    730,000
    
    
    $
    15,000
    
    
    
    2
    %
 Research and development, clinical and regulatory expenses increased slightly over the first
quarter of 2004. Selling, General and Administrative Expenses Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeGross Profit
    
    $
    847,000
    
    
    $
    1,425,000
    
    
    $
    578,000
    
    
    
    68
    %Selling, General and
Administrative Expenses
    
    
    2,269,000
    
    
    
    2,892,000
    
    
    
    623,000
    
    
    
    27
    %SG&A as % of Gross Profit
    
    
    268
    %
    
    
    203
    %
 Selling, general and administrative expenses increased primarily due to a $245,000 increase in
payroll costs resulting from increased headcount, mainly to support direct sales efforts described
above, a $198,000 increase in sales-related marketing expenses and a $33,000 unfavorable foreign
currency exchange rate impact on non-U.S. selling, general and administrative expenses. We believe that a decrease in our SG&A expenses as a percentage of our gross profit from 268%
in the first quarter of 2004 to 203% in the first quarter of 2005 is a useful measure of our
performance. During the remainder of the year, we expect gross profits to increase more rapidly
than sales as our higher margin NMP22 products, including our Lab Test Kit and our BladderChek
Test, become a larger percentage of our sales and the lower margin non-NMP22 products decrease as a
percentage of sales. We also expect the growth in gross profits to exceed the growth in SG&A
expenses, and that SG&A expenses as a percent of our gross profit should continue to decline. Operating Loss Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeOperating Loss
    
    $
    2,090,000
    
    
    $
    2,165,000
    
    
    $
    75,000
    
    
    
    4
    %
 The operating loss increased primarily due to increased selling, general and administrative
expenses discussed above offset by higher gross profit. Interest Income Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeInterest Income
    
    $
    20,000
    
    
    $
    27,000
    
    
    $
    7,000
    
    
    
    35
    %
 Interest income increased slightly over the first quarter of 2004 due to higher interest
rates. Interest Expense Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    99,000
    
    
    $
    50,000
    
    
    $
    (49,000
    )
    
    
    (49
    %)Non-Cash Charges to Interest Expense
    
    
    519,000
    
    
    
    621,000
    
    
    
    102,000
    
    
    
    20
    %Total
    
    
    618,000
    
    
    
    671,000
    
    
    
    53,000
    
    
    
    9
    %Interest Related to Other Debt:Interest Paid in Cash
    
    
    4,000
    
    
    
    1,000
    
    
    
    (3,000
    )
    
    
    (75
    %)Total Interest
    
    $
    622,000
    
    
    $
    672,000
    
    
    $
    50,000
    
    
    
    8
    %
 We completed a $5 million private placement of Convertible Debentures in March of 2003 and,
subsequent to issuance, have recorded an additional $4.6 million of non-cash charges related to the
Convertible Debentures which are being charged to our income statement through March 2006. As of
March 31, 2005, approximately $3.7 million of the $5.0 million non-cash charges and deferred
financing costs have been amortized and charged as interest expense and the remaining $1.3 million
will be amortized using the effective interest rate method over the remaining quarters through
March 2006. The Convertible Debentures allow the interest and principal to be paid in common stock at a
discount to valuation, but only if (i) we are not in default under the terms of the Convertible
Debentures, (ii) there is an effective registration statement 13




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##### Table of Contents



covering such shares, (iii) our common stock is listed on one of American Stock Exchange, New
York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market, (iv) we have provided proper
notice of our election to make payments in stock and have made payment of all other amounts then
due under the Convertible Debentures, (v) the issuance of such shares would not cause the holders
to own more than 9.999% of the outstanding shares of our common stock, (vi) no public announcement
of a change of control or other reclassification transaction has been made and (vii) we have
sufficient authorized but unissued and unreserved shares to satisfy all share issuance obligations
under the March 2003 financing. The $54,000 interest payment for the first quarter of 2005 was
made in stock and the January, February and March, 2005 principal repayments of $192,000 each were
made in stock and, unless a default occurs, the remaining payments scheduled for both interest and
principal are expected to be made in stock. Non-Cash Charges to Interest Expense consisted of:  
    $39,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $80,000 at March 31, 2005;
    $98,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash;
    $484,000 of amortized debt discount, which contributed to reducing the $4,558,000
of debt discount on our $5,000,000 note to $1,280,000 at March 31, 2005. This debt
discount is comprised of the following: the fair value allocated to the warrants
issued in conjunction with the convertible debt, the charge to account for the
beneficial conversion feature recorded at the date the debt was entered into, and
additional charges to account for the beneficial conversion feature recorded in the
fourth quarter of 2003, the first quarter of 2004 and the first quarter of 2005 as a
result of the triggering of the anti-dilution provisions. The following table demonstrates the accounting for the Convertible Debentures and related
discounts during 2003, 2004 and 2005 and the resulting balance at March 31, 2005. Value of DebenturesOriginal Value of Debt
    
    $
    5,000,000Discounts Recorded in 2003
    
    
    (2,777,000
    )2003 Amortization of Discounts
    
    
    644,000Carrying Value of Debt at 12/31/2003
    
    $
    2,867,000Discounts Recorded in 2004
    
    
    (1,339,000
    )2004 Amortization of Discounts
    
    
    2,150,000Payment in Stock
    
    
    (1,923,000
    )Carrying Value of Debt at 12/31/2004
    
    $
    1,755,000Discounts Recorded in 2005
    
    
    (442,000
    )2005 Amortization of Discounts
    
    
    484,000Payment in Stock
    
    
    (577,000
    )Carrying Value of Debt at 3/31/05
    
    $
    1,220,000
 None of the types of activities listed in the above table is expected to affect our cash
balances unless we are unable to use our common stock to make principal and interest payments.
Using our common stock for the above activities will result in additional dilution. See Factors
That May Affect Future Results  We have substantially increased our indebtedness and may not be
able to meet our payment obligation. Mark to market adjustment from warrants Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeMark to Market Adjustment From Warrants
    
    
    
    
    
    $
    714,000
    
    
    $
    714,000
    
    
    
    100
    %
 Mark to market adjustment from warrants represents the net decrease in fair value of the 2005
Warrants we issued in connection with our Series A Preferred Stock issuance in March, 2005. The
adjustment was driven by a reduction of our stock price from the date of the closing of the
financing as compared to the stock price as of March 31, 2005. Transaction costs of $377,000 were
allocated to the warrants and expensed upon closing of the
transaction, offsetting subsequent mark to market warrant adjustments. 14




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##### Table of Contents



Net Loss Q1 2004
    
    
    Q1 2005
    
    
    $ Change
    
    
    % ChangeNet Loss
    
    $
    2,692,000
    
    
    $
    2,095,000
    
    
    $
    (597,000
    )
    
    
    (22
    %)Net Loss Attributable to Common Shareholders
    
    $
    2,692,000
    
    
    $
    3,723,000
    
    
    $
    1,031,000
    
    
    
    38
    %
 The net loss decreased primarily due to increased selling, general and administrative expenses
and increased interest expense discussed above, offset by the increase in revenues and mark to
market adjustment from warrants. The net loss attributable to common shareholders increased due to
the preferred stock beneficial conversion feature associated with the Series A Preferred Stock
issuance in March, 2005. The amounts of the beneficial conversion feature has been immediately
accreted as a deemed dividend since the preferred stock is immediately convertible. The deemed
dividends have been reflected as an adjustment to net loss attributable to common shareholders on
our Consolidated Statements of Operations. Liquidity and Capital Resources Our operating activities used cash in the first three months of 2004 and 2005 primarily to
fund our Net Losses excluding non-cash charges. The non-cash charges are comprised of depreciation
and amortization expenses, amortization of debt discounts and deferred charges related to our
convertible debt offset by mark to market adjustments related to the warrants issued in our Series
A Preferred Stock financing. Summary Cash Flow Three MonthsEnded
    
    
    Three Months EndedMarch 31, 2004
    
    
    March 31, 2005Net Loss
    
    $
    (2,692,000
    )
    
    $
    (2,095,000
    )Non-cash Charges
    
    
    672,000
    
    
    
    18,000Changes in Assets and Liabilities
    
    
    (66,000
    )
    
    
    (264,000
    )Net Operating Uses
    
    
    (2,086,000
    )
    
    
    (2,341,000
    )Net Investment Uses
    
    
    (32,000
    )
    
    
    (66,000
    )Net Financing Sources
    
    
    5,814,000
    
    
    
    5,331,000Foreign exchange effect
    
    
    (8,000
    )
    
    
    4,000Change in cash and cash equivalents
    
    $
    3,688,000
    
    
    $
    2,928,000
 Our operating activities used cash in 2004 and 2005 primarily to fund our operating losses
excluding non-cash charges. The non-cash charges in 2004 and 2005 were due to amortization of debt
discount and deferred charges related to our convertible debt offset by mark to market adjustments
related to the 2005 Warrants issued in our Series A Preferred Stock financing. We expect that the Days Sales Outstanding
(DSO) is likely to be higher in the future than the 39 days measured at March 31, 2005. The
comparable measurement at March 31, 2004 was 53 days. We will, as we deem necessary or prudent, continue to seek to raise additional capital and
will consider various financing alternatives, including equity or debt financings convertible into
equity and corporate partnering arrangements. We do not expect to raise significant debt capital
over the next year because our Convertible Debenture has a prohibition against any debt having a
ranking senior to the Convertible Debenture. In addition, after the Convertible Debenture is
retired we will still face constraints imposed by our Series A Preferred Stock. If we raise funds on unfavorable terms, we may provide rights and preferences to new investors
which are not available to current shareholders or debt holders. For example, the Convertible
Debenture financing granted the holders anti-dilution rights which were not granted to any other
equity or warrant holder. When we completed our financing in March, 2005, the conversion price of
the debentures was adjusted downward from $1.51 to $.99 which resulted in 869,623 shares of
additional dilution or about 1% of the fully diluted stock on an if converted basis in the table
below. Future sales of common stock below $.99 could result in additional dilution for which we
would receive no additional consideration. 15




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##### Table of Contents



Any future equity financings will dilute the ownership interest of our existing investors and
may have an adverse impact on the price of our common stock. As of March 31, 2005, our fully
diluted if converted common shares were: Common stock outstanding
    
    
    43,719,000Stock reserved for converting debentures
    
    
    2,525,000Stock reserved for warrant exercises
    
    
    10,413,000Stock reserved for outstanding stock options
    
    
    3,027,000Stock reserved for Series A Preferred Stock
    
    
    6,703,000Total
    
    
    66,387,000
 The above table includes shares for converting the Convertible Debentures. We plan to use our
common stock to pay interest and to redeem the debenture if it is not converted, and such use of
our common stock will result in further dilution, particularly if our share price declines
significantly. The above chart also does not include any additional shares we may be required to
issue if we engage in a financing transaction which is deemed to be an anti-dilutive issuance under
the terms of our Convertible Debenture. Since our authorized common stock is 90 million shares, if our shareholders do not authorize
additional stock when requested, we may be unable to issue adequate amounts of additional equity to
finance our operations appropriately. Financings On March 4, 2005, we entered into a purchase agreement which provides for the sale through a
Private Placement of an aggregate of 1,426,124 shares of our Series A Preferred Stock, par value
$1.00 per share and the issuance to the investors of warrants to purchase 4,991,434 shares of our
common stock at a price of $1.47 per share. Each share of our Series A Preferred Stock is
convertible into ten shares of our common stock. We cannot issue all shares of the Series A
Preferred Stock that we have agreed to sell without obtaining stockholder approval because the
shares into which the Series A Preferred Stock are convertible would exceed 20% of our outstanding
common stock. The table below provides highlights of the Private Placement including the First Closing which
has occurred and the Second Closing which is subject to stockholder approval. Shares ofStockholder
    
    
    
    
    
    
    Series AApproval
    
    
    
    
    
    
    Preferred
    
    
    Conversion
    
    
    2005
    
    
    TotalNeeded
    
    
    Status
    
    
    Stock
    
    
    Shares
    
    
    Warrants
    
    
    ConsiderationFirst Closing
    
    
    
    
    
    CompletedNo
    
    March 2005
    
    
    670,272
    
    
    
    6,702,720
    
    
    
    4,991,434
    
    
    $
    5,898,394Second Closing
    
    
    
    
    
    IfApproved,Yes
    
    May 2005
    
    
    755,852
    
    
    
    7,558,520
    
    
    
    0
    
    
    $
    6,651,498
 On March 4, 2005, we completed the First Closing and in connection therewith issued warrants
to a placement agent for a total of 656,920 shares of common stock at an exercise price of $1.47
per share. Based on the conversion rate, the price we received equates to $ .88 per share of
common stock. The conversion price and the exercise price of the warrants are subject to
adjustment in the event of subsequent dilutive issuances. The holders of Series A Preferred Stock
are entitled to a liquidation preference and have the benefit of covenants of the Company not to
liquidate, merge, sell control or substantially all assets, issue debt or senior equity securities,
or amend the charter in any way adverse to the holders. We are obligated not to issue other
securities that would be senior to the Series A Preferred Stock, not to incur indebtedness in
excess of $2,000,000 except in limited forms, and not to enter into or consummate a transaction
which would result in the holders of all the voting power of our outstanding capital stock having
less than a majority of voting power of a surviving entity after a merger, consolidation, share
exchange or sale. We are further required to reserve sufficient shares of common stock for
issuance upon conversion of the Series A Preferred Stock and exercise of the Warrants and to list
the common shares into which the Series A Preferred Stock may be converted or which may result from
exercise of the Warrants with the American Stock Exchange. We will seek stockholder approval of this transaction at our Annual Meeting of Stockholders to
be held on May 25, 2005 or such other date to which such meeting may be adjourned. Under the
Purchase Agreement and under American Stock 16




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##### Table of Contents



Exchange Rule 713, we need stockholder approval to sell additional shares of Series A
Preferred Stock. Stockholder approval is also necessary to enable us issue more Conversion Shares
at a conversion price below the current conversion floor of $ .70 per share or to issue shares of
common stock upon exercise of the warrants at an exercise price below $1.34 per share if the
anti-dilution provisions to which we have agreed are triggered. If stockholder approval is received, we intend to complete a second closing for the sale of an
additional 755,852 shares of Series A Preferred Stock for an aggregate consideration of $6,651,498
(before cash commissions and expenses), and will issue additional five year placement agent
warrants for a further 740,796 shares of common stock at an exercise price of $1.47 per share. The net cash proceeds of $5,325,000 from the First Closing, further reduced by the fair value
of the placement agent warrants totaling $562,000, were allocated between the Series A Preferred
Stock (approximately $869,000) and the 2005 Warrants (approximately $3,894,000). In this
allocation, the 2005 Warrants are recorded as a liability at their fair value as set forth below
and the Series A Preferred Stock is allocated the remaining balance of the net proceeds. The value
of the 2005 Warrants was calculated using the Black-Scholes pricing model with the following
assumptions: dividend yield of zero percent; expected volatility of 85%; risk free interest rate
of approximately 4% and a term of five years. In connection with the issuance of the Series A Preferred Stock, we recorded a beneficial
conversion feature of $1,627,000. A beneficial conversion feature is recorded when the
consideration allocated to the convertible security, divided by the number of common shares into
which the security converts, is below the fair value of the common stock into which the Series A
Preferred Stock can convert at the date of issuance. The amount of the beneficial conversion
feature has been immediately accreted as a deemed dividend because the preferred stock is
immediately convertible. The value of the beneficial conversion feature has been reflected as an
adjustment to the net loss attributable to common shareholders on our Consolidated Statement of
Operations. As part of the Private Placement, we entered into a Registration Rights Agreement committing
to timely file a registration statement covering the resale of the Conversion Shares and the shares
for which the 2005 Warrants may be exercised. If we fail to timely file a registration statement,
if the registration statement is not declared effective within certain time limits or if the
registration statement does not remain effective, we are obligated to pay liquidated damages in an
amount equal to 1.5% of the consideration paid for the Series A Preferred Stock for each thirty day
period during which the failure persists. In accordance with Emerging Issues Task Force
(EITF) 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled
in a Companys Own Stock,(EITF 00-19), a transaction which includes a potential for net-cash
settlement, including liquidated damages, requires that derivative financial instruments, including
warrants, be recorded at fair value as a liability and that subsequent changes in fair value be
reflected in the statement of operations. We concluded that the Registration Rights Agreement
liquidated damages provision applicable to the Warrant Shares meets the definition of net cash
settlement under EITF 00-19. In accordance with EITF 00-19, the fair value of the warrants
of $4,271,000 was accounted for as a liability at March 4, the date of the
First Closing, and the subsequent changes in the fair value of the 2005 Warrants as of March 31
(approximately $1,091,000) are reflected on our Consolidated Statement of Operations as mark to
market warrant adjustments. Transaction costs of $377,000 were
allocated to the warrants and expensed upon closing of the
transaction, offsetting subsequent mark to market warrant adjustments. On April 18, 2005, we amended the Registration Rights Agreement to eliminate any liquidated
damage provision with respect to a failure to maintain the effectiveness of a registration
statement covering resale of the Warrant Shares. On May 9, 2005 the registration statement
covering resale of the Warrant Shares became effective and the 2005 Warrants were reclassified as
equity because there is no future potential for a net-cash settlement with regard to the 2005
Warrants. The resulting mark to market adjustments and the reclassification of the 2005 Warrants
will be presented in the Companys financial statements for the quarter ending June 30, 2005. This sale has been deemed to be a dilutive issuance under the terms of our Convertible
Debentures and our March 2003 Warrants. As a result, as of March 4, 2005, the Convertible
Debentures are currently exercisable into 2,525,253 shares of our common stock at a price of $ .99
per share, representing a current increase of 869,623 shares from the conversion terms of the
Debentures at December 31, 2004, and the March Warrants are exercisable to purchase shares of our
common stock at a price of $ .88 per share. We have calculated an additional beneficial conversion
charge totaling approximately $442,000 which will be recorded as a debt discount in the first
quarter of 2005 and amortized over the remaining life of the Debentures. We have no material capital expenditure commitments. 17




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Off Balance Sheet Arrangements Currently, we have no off balance sheet arrangements. Critical Accounting Policies and Estimates These financial statements have been prepared in conformity with accounting principles
generally accepted in the United States. Preparation of these statements requires management to
make judgments and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of our significant accounting policies and a
description of accounting policies that are considered critical is contained in our 2004 Annual
Report on Form 10-K, filed on March 14, 2005 in the Notes to Consolidated Financial Statements,
Note 1 and the Critical Accounting Policies section. Research and Development We are engaged in the research, production and marketing of cancer diagnostic technologies.
All of our research and development expenditures, whether conducted by our own staff or by external
scientists on our behalf and at our expense, are recorded as expenses as incurred and amounted to
approximately $46.1 million for the period since our inception in October of 1987 through March 31,
2005. Research and development expenses include the salaries and related overhead of our research
personnel, laboratory supplies, payments to third parties to help us execute clinical trials,
depreciation of research related equipment, legal expenses related to filing and prosecuting
patents, other direct expenses and an allocation of our occupancy and related expenses based on the
square footage occupied by our research and development staff and their laboratories. Our research and development scientists typically are assigned to one project at a time but
may also provide support for other projects. In addition, our various programs share a substantial
amount of our common fixed costs such as facility depreciation, utilities and maintenance. All of
our research and development programs are similar in nature as they are based on our common protein
discovery technology and a significant finding in any one cancer type may provide a similar benefit
across all programs. Accordingly, we do not track our research and development costs by individual
research and development programs. Development Programs The table below summarizes our development programs, including stage of development and
current FDA status. Principal FDAClinical
    
    
    
    
    
    Approved
    
    MajorTechnology
    
    Applic-
    
    Stage of
    
    FDA Review
    
    Competitive
    
    CommercializationProgram
    
    Format
    
    ation
    
    Development
    
    Status
    
    Products (1)
    
    Arrangements (2)NMP22 Bladder
    
    Lab Test Kit
    
    Monitoring
    
    Commercialized
    
    Approved
    
    BTA Trak
UroVysion
    
    (1) Matritech
direct marketing 
U.S. and Germany(2) Wampole
Laboratories  U.S.
 Distributor(3) Diagnostic
Products
Corporation 
Europe  Automated
Kit Manufacturer
and Distributor(4) Konica Minolta  Japan  DistributorNMP22 Bladder
    
    Lab Test Kit
    
    Diagnosis
    
    Commercialized
    
    Approved
    
    UroVysion
    
    (1) Matritech
direct marketing 
U.S. and Germany(2) Wampole
Laboratories  U.S.
 Distributor(3) Diagnostic
Products
Corporation 
Europe  Automated
Kit Manufacturer
and Distributor(4) Konica Minolta  Japan  DistributorNMP22 Bladder
    
    Point Of Care Test
    
    Monitoring
    
    Commercialized
    
    Cleared
    
    BTA Stat
    
    (1) Matritech
direct marketing 
U.S.
and GermanyNMP22 Bladder
    
    Point Of Care Test
    
    Diagnosis
    
    Commercialized
    
    Approved
    
    None
    
    (1) Matritech
direct marketing 
U.S. and Germany
 18




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Principal FDAClinical
    
    
    
    
    
    Approved
    
    MajorTechnology
    
    Applic-
    
    Stage of
    
    FDA Review
    
    Competitive
    
    CommercializationProgram
    
    Format
    
    ation
    
    Development
    
    Status
    
    Products (1)
    
    Arrangements (2)NMP179 Cervical
    
    Automated Cellular
Analysis System
    
    Screening
    
    Licensee Sysmex is
conducting further
pre-clinical trials
    
    Not yet submitted
    
    TriPath
Cytyc
    
    (1) Sysmex  World
 Manufacturer and
Marketer for Non-
Slide-Based SystemNMP66 Breast
    
    To be determined
    
    Not Determined
    
    Research and
Development
    
    Not yet submitted
    
    Mammography,
TRUQUANT®BR RIA
CA27.29, CA15.3
    
    (1) Mitsubishi
Kagaku Iastron,
Inc. (MKI) 
JapanNMP48 Prostate
    
    To be determined
    
    Not Determined
    
    Deferred
    
    Not yet submitted
    
    PSANMP35 Colon
    
    None yet
    
    Not Determined
    
    Inactive
    
    Not yet submitted
    
    CEA, CA19.9
   1   Each of the products listed as competitive to our NMP products may
compete for use in each indication for our NMP products, not simply
those specifically listed in a category. Those listed for each
category represent the competitive products most directly comparable
in technology or approach for the given indication.2   Other distributors not listed under major commercialization
arrangements have not paid upfront fees in excess of $50,000, do not
have cumulative sales in excess of $500,000 and do not have rights
other than those of a conventional distributor. Spending on Research and Development Projects.Total research and development
spending in the first quarter of 2005 was approximately $730,000. We expect research and
development expenditures to be less than $3.2 million in 2005 and to be devoted to our various
programs as discussed below. NMP22  Bladder.Except for sponsoring additional clinical trials to demonstrate different
ways to use the information generated by the products, we do not currently plan to incur any
significant additional research spending on any of these products. We do expect to spend, from
time to time, funds for product support and manufacturing improvement which are not expected to
exceed $750,000 over 2005 and 2006. NMP179  Cervical.Discovery research on this product was completed prior to 2000 and our
expenditures in 2004 and 2005 have been principally for technical support of the licensing
activity. Substantially all future costs to support additional research and development of this
product are expected to be paid for by Sysmex. During Q1 2005 we purchased $60,000 of specimens
for cervical cancer testing which we expect to sell to Sysmex, even though we do not have a signed
contract for selling such specimens to Sysmex, as part of our collaboration with them. If we incur
any additional costs in connection with this program, we expect such costs to be aimed at licensing
this technology to a company with a slide-based cervical cancer detection system. Breast Cancer.Over the next two years, research and development funds will be spent
principally to develop products and services for breast cancer, to improve our mass spectrometry
technology and to further develop our ligand binding based technology for Lab Test Kits and/or
Point Of Care Tests. Prostate Cancer. Over the next two years, we intend to devote more research and development
resources to our prostate cancer program if the NMP66 program does not require all our research and
development resources. Because of uncertainties of when we will more actively pursue our prostate
cancer program, we cannot reasonably estimate the likelihood or timeframe for reaching
commercialization goals set forth in the table above. Other existing programs. We will make decisions on how and when to proceed with our other
existing programs based on our progress with the breast cancer and prostate cancer programs and the
availability of appropriate resources for our remaining programs. We may consider options
including, but not limited to, terminating certain activities, licensing the technology to third
parties or selling the technology to third parties. The nature, timing and costs of the efforts to
reach our commercialization goals, and the amount or timing of the net cash inflows of our
individual programs, are not possible to predict. 19




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Factors That May Affect Future Results Our future financial and operational results are subject to a number of material risks and
uncertainties that may affect such results or conditions, including: We have a history of operating losses, are continuing to lose money and may never be
profitable. We have incurred operating losses since we began operations in 1987. These losses have
resulted principally from costs incurred in research and development and from selling, general and
administrative costs associated with our market development and selling efforts. Our accumulated
deficit from inception until the end of the last fiscal year is $90,122,000. Our product sales and
net losses for each of the past three fiscal years have been: 2002
    
    
    2003
    
    
    2004
    
    

Q1 05Product Sales
    
    $
    3,094,000
    
    
    $
    4,018,000
    
    
    $
    7,275,000
    
    
    $
    2,143,000Net Losses
    
    $
    8,278,000
    
    
    $
    7,878,000
    
    
    $
    11,123,000
    
    
    $
    2,095,000
 We expect to continue to incur additional operating losses in the future as we continue to
develop new products and seek to commercialize the results of our research and development efforts.
Our ability to achieve long-term profitability is dependent upon our success in those development
and commercializing efforts. We do not believe we will be profitable in the foreseeable future. We will need to obtain additional capital in the future and if we are unable to obtain such
capital on acceptable terms, or at the appropriate time, we may not be able to continue our
existing operations. We do not currently generate revenues sufficient to operate our business and do not believe we
will do so in the foreseeable future. In our fiscal quarter ended March 31, 2005, we had a net
loss of $2.1 million, and as of March 31, 2005, we only had $7.8 million of cash and cash
equivalents. As a result, we must rely on our ability to raise capital from outside sources in
order to continue operations in the long-term. In March, 2003 we completed a sale of Convertible
Debentures and accompanying warrants. In October and November 2003 we completed a sale of common
stock and accompanying warrants. In March 2004 we completed a sale of common stock and
accompanying warrants. In March 2005 we completed a sale of convertible preferred stock and
accompanying warrants for common stock. We will, as we deem necessary or prudent, continue to seek
to raise additional capital through various financing alternatives, including equity or debt
financings and corporate partnering arrangements. However, we may not be able to raise needed
capital on terms that are acceptable to us, or at all. The terms of our 2003 sales of Convertible Debentures and common stock greatly restrict our
ability to raise capital. Under the terms of our Convertible Debenture financing, we are
prohibited from entering into obligations that are senior to the debentures. These provisions may
severely limit our ability to attract new investors and raise additional financing on acceptable
terms. In addition, in order to attract such new investors and obtain additional capital, we may
be forced to provide rights and preferences to new investors which are not available to current
shareholders. If we do not receive an adequate amount of additional financing in the future, we may be
unable to meet any cash payment obligations required by the Convertible Debentures, or we may be
required to curtail our expenses or to take other steps that could hurt our future performance,
including but not limited to, the premature sale of some or all of our assets or product lines on
undesirable terms, merger with or acquisition by another company on unsatisfactory terms or the
cessation of operations. We have substantial indebtedness and may not be able to meet our payment obligations. As a result of the 2003 sale of Convertible Debentures, we substantially increased our
indebtedness from approximately $475,000 at the end of 2002 to approximately $2.5 million as of
March 31, 2005. The fair value of the Convertible Debentures at March 31, 2005 as estimated by
management is approximately $2.3 million. The $1.2 million carrying value in the Companys
financial statements at March 31, 2005 reflects discounts related to beneficial conversion charges
calculated in accordance with EITF Issue No. 00-27. The Convertible Debentures permit us to make interest and principal payments in shares of
common stock instead of cash, but only if (i) we are not in default under the terms of the
Convertible Debentures, (ii) there is an effective registration statement covering such shares,
(iii) our common stock is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq
National Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our election to
make payments in stock and have made payment of all other amounts then due under the Convertible
Debentures, (v) the issuance of such shares would not cause the holders to own more than 9.999% of
the outstanding shares of our common stock, (vi) no public announcement of a change of control or
other reclassification transaction has been made and (vii) we have sufficient authorized but
unissued and unreserved shares to satisfy all share issuance obligations under the March 2003
financing. If we 20




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are not able to make interest and principal payments on the debentures in shares of stock,
such payments must be made in cash and, unless we are able to raise additional capital from another
source, we may not have sufficient funds to make such payments. If we make such payments in stock,
however, it will result in significant dilution. In addition, the Convertible Debentures require us to pay interest and liquidated damages and
may become immediately due and payable at a premium of 120% of the outstanding principal amount
plus accrued interest and damages in the event we default under their terms. Potential defaults
would include, among other things:  
    our inability to make payments as they become due;
    failure to remain listed on any of the Nasdaq SmallCap Market, New York Stock
Exchange, American Stock Exchange or the Nasdaq National Market;
    sale or disposition of our assets in excess of 33% of our total assets;
    failure to timely deliver stock certificates upon conversion; and
    default on our existing or future liabilities in excess of $150,000. If we default under the terms of the Convertible Debentures, we probably will not be able to
meet our payment obligations. In addition, the increased level of our indebtedness could, among
other things:  
    make it difficult for us to make payment on this debt and other obligations;
    make it difficult for us to obtain future financing;
    require redirection of significant amounts of cash flow from operations to service our indebtedness;
    require us to take measures such as the reduction in scale of our operations that
might hurt our future performance in order to satisfy our debt obligations; and
    make us more vulnerable to bankruptcy. The operations of our European subsidiary involve currency exchange variability and other
risks. Matritech GmbH, our European subsidiary, accounted for approximately 62% of our product sales
for the fiscal quarter ended March 31, 2005. Accounts of our European subsidiary are maintained in
Euros and are translated into U.S. Dollars. To the extent that foreign currency exchange rates
fluctuate in the future, we may be exposed to significant financial variability, both favorable and
unfavorable. During the first quarter of 2005, exchange rate fluctuations were favorable as
indicated in the Managements Discussion and Analysis of Financial Condition and Results of
Operations. However, rate changes in the future may lead to unfavorable results. In addition, although we have integrated the operations of this subsidiary since its
acquisition in June 2000, we still must coordinate geographically separate organizations, manage
personnel with disparate business backgrounds and conduct business in a different regulatory and
corporate culture. It remains to be seen whether the use of this subsidiary to spearhead the
marketing effort of our products in Europe outside of Germany will be successful in the long-term. Our cash requirements have significantly increased to support a larger employee sales force;
to pay for order processing, shipping and collection costs normally borne by distributors; and to
finance the accounts receivable from physician practices that likely will be collected over a
longer cycle. Since November 2003 we have had the responsibility for sales of NMP22 BladderChek Tests to
urologists in the U.S., including invoicing and collecting the revenue from sales. We have
increased our sales and marketing expenditures and added order processing, shipping and collection
resources to perform functions which have in the past been performed by our U.S. distributor. We
have limited experience in performing these functions in the United States to support sales
directly to physicians, and the time and cost to develop these resources combined with the risk
that they may not function effectively increases the risk that the rate of sales growth for our
NMP22 BladderChek Test will slow. Sales of products directly to physicians may result in larger accounts receivable and longer
collection cycles than sales to distributors and may increase the risk that accounts receivable
will not be collected. Carrying larger accounts receivable balances and assuming greater collection
risk may also increase our financing requirements. We do not expect our Days Sales Outstanding to
remain at 39 days, the measurement calculated from our March 31, 2005 financial results. 21




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We rely primarily on distributors to market NMP22 BladderChek Tests in territories other than
the United States and Germany, but our history with our distributors is limited and we do not know
whether they will achieve substantial sales levels of our products. We compete with other methods of diagnosing cancer that are in existence or may be
successfully developed by others and our technology may not prevail. Although we are not aware of any other company using nuclear matrix protein technology in
commercial diagnostic or therapeutic products, competition in the development and marketing of
cancer diagnostics and therapeutics, using a variety of technologies, is intense. Many
pharmaceutical companies, biotechnology companies, public and private universities and research
organizations actively engage in the research and development of cancer diagnostic products. Many
of these organizations have greater financial, manufacturing, marketing and human resources than we
do. We expect that our Lab Test Kits and our Point Of Care Tests will compete with existing
FDA-approved tests, such as tests known as BTA and UroVysion bladder cancer tests, the latter of
which has been approved for both monitoring and diagnosing bladder cancer and the former of which
has been approved for monitoring bladder cancer and may become approved for diagnosis of bladder
cancer; a test known as CEA, which is used primarily for monitoring colorectal and breast cancers;
a test known as CA19.9, which is used primarily for monitoring colorectal and gastric cancers; a
test known as PSA, which is used primarily for monitoring and screening prostate cancer; tests
known as TRUQUANT® BR RIA, CA15.3 and CA27.29, which are used for monitoring breast cancer; and
cervical specimen collection and analysis systems known as ThinPrep® (Cytyc) and SurePath (TriPath
Imaging). We are also aware of a number of companies that have announced that they are engaged in
developing cancer diagnostic products based upon oncogene technology. Our diagnostic products will
also compete with more invasive or expensive procedures such as minimally invasive surgery, bone
scans, magnetic resonance imaging and other in vivo imaging techniques. In addition, other
companies may introduce competing diagnostic products based on alternative technologies that may
adversely affect our competitive position. As a result, our products may become less competitive,
obsolete or non-competitive. Healthcare reform measures, third-party reimbursement policies and physician or hospital
preferences could limit the per-product revenues for our products in certain territories and make
it uneconomical to sell or distribute them. Our ability to successfully convert market opportunities into significant sales for our
products depends in part on the extent to which adequate reimbursement for the services based on
our products will be available from government healthcare reimbursement authorities (such as
Medicare in the United States), private health insurers and other third-party payors. In most
countries, no reimbursement of any medical device (or a service based on a medical device) is
typically provided by any insurance carrier, whether public or private, if the device or service
has not received approval for clinical use from that nations healthcare product regulatory
authorities (such as the FDA in the United States). Even if the use of a device or the performance
of a service has been previously approved for reimbursement, some insurance carriers and healthcare
plans may decide not to continue to reimburse it at all, not to continue to reimburse it for
certain medical applications and/or to decrease the reimbursement amount. If we develop a
Proprietary Laboratory Procedure for the U.S. market that does not require FDA approval, we do not
expect third-party reimbursement until we obtain FDA approval for a product which generates similar
clinical data. Even if we obtain FDA approval for a product in the U.S., there is no assurance that we will
receive similar approvals from national healthcare product regulatory authorities in other
countries. If we obtain such approvals in other countries, reimbursement levels could be so low
that it would put pressure on us to reduce our prices. Such low reimbursement would make our
products much less profitable and, in the extreme, could make it uneconomical for us and/or our
distributor to sell the product at all in those countries. If such a low reimbursement were to
occur in the United States or in Germany, it could substantially reduce our revenues and increase
our losses. On the other hand, reimbursement approval, if provided in a lower but adequate amount,
could potentially broaden the number of patients who could afford the product or service. We
believe this has occurred in the United States as reimbursement has been obtained in most states.
We expect that reimbursement approval will be obtained in some other countries where our products
are sold, but do not believe reimbursement rates in all countries will be as favorable as in the
U.S. Reimbursement approval for the BladderChek Test has not yet occurred in the principal
countries of Asia and Europe, including Germany, where the BladderChek Tests are being sold or are
in the regulatory process to secure approval from national product regulatory authorities. Healthcare reform is an area of continuing attention and a priority of many governmental
officials. In the United States, Medicare has frozen reimbursement for clinical laboratory tests at
2003 levels and future changes could impose limitations on the prices we will be able to charge for
our products or the amount of reimbursement available for our products from governmental agencies
or third-party payors. While we cannot predict whether any legislative or regulatory proposals will
be adopted or the effect that such proposals could have on our business, the announcement or
adoption of such proposals could 22




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reduce the profitability of our business and as a result could have a negative effect on our stock
price because of investor reactions. The preferences of physicians, hospitals, clinics and other customers may also limit our
per-product revenue because their profit expectations when purchasing our product may influence
their use and ordering behavior. Physicians have developed an expectation for generating profits
when they purchase devices for use at their practice. To the extent that we are unable to price our
products to achieve physician profit expectations, sales of our devices may suffer. We and our distributors are subject to extensive government regulation which adds to the cost
and complexity of our business, may result in unexpected delays and difficulties, may impose severe
penalties for violations and may prevent the ultimate sale or distribution of our products in
certain countries. The FDA and many foreign governments stringently regulate the medical devices that we
manufacture and that we and our distributors market to physicians or other customers. The FDA
regulates the clinical testing, manufacture, labeling, distribution and promotion of medical
devices in the United States and agencies in the European Union, Japan and other countries where we
sell our products each have their own regulations. If our products do not receive appropriate
approvals from medical device regulatory authorities in any country, we can not sell our products
in that country, either on our own or through any distributor. Any products that we or our suppliers manufacture or distribute in accordance with FDA
approvals are subject to stringent regulation by the FDA, including:  
    keeping records and reporting adverse experiences with the use of the devices we
make and distribute;
    registering our establishments and listing our devices with the FDA. Manufacturing
establishments are subject to periodic inspections by the FDA and certain state
agencies; and
    requiring our products to be manufactured in accordance with complex regulations
known as Quality System Regulations which include procedural and documentation
requirements for our manufacturing and quality assurance activities. If we fail to comply with any FDA requirement, we may face a number of costly and/or time
consuming enforcement actions, including:  
    fines;
    injunctions;
    civil penalties;
    recall or seizure of products;
    total or partial suspension of production;
    delay or refusal of the agency to grant premarket clearance or premarket approval
for other devices in our development pipeline;
    withdrawal of marketing approvals; and
    criminal prosecution. The FDA and foreign governmental agencies have the authority to request the repair,
replacement or refund of the cost of any device that we manufacture or distribute if it is faulty.
Failure to comply with medical device and quality regulations in countries outside the United
States where we sell our products can result in fines, penalties, seizure or return of products and
the inability to sell the product in those countries either on our own or through our distributors. Labeling and promotional activities are subject to scrutiny in the United States by the FDA
and, in certain instances, by the Federal Trade Commission, and by regulatory bodies in most
countries outside the United States where we sell products. For example, our Lab Test Kit has
received FDA approval and may be promoted by us only as an aid in the management of patients with
bladder cancer or as a diagnostic aid for use for previously undiagnosed individuals who have
symptoms of or are at risk for bladder cancer. The FDA actively enforces regulations prohibiting
the promotion of devices for unapproved uses and the promotion of devices for which premarket
approval has not been obtained. Consequently, for example, we cannot promote the Lab Test Kit or
the BladderChek Test for any unapproved use. In addition to federal regulations regarding manufacture and promotion of medical devices, we
are also subject to a number of state laws and regulations which may hinder our ability to market
our products in those states or localities. Manufacturers in 23




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general 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. We may be required to incur
significant costs to comply with these laws and regulations in the future, which could increase
future losses or reduce future profitability. We have no demonstrated success in developing cellular analysis systems and any future success
in this area will be highly dependent upon Sysmex. We believe the future success of our business will also depend, in part, upon Sysmex
Corporation developing a satisfactory Cellular Analysis System to be used to measure clinically
useful cervical disease proteins. Even if Sysmex completes its product development efforts to its
satisfaction, it is expected to face significant obstacles (including but not limited to those set
forth in Factors That May Affect Future Results  Successful technical development of our products
does not guarantee successful commercialization.) in developing a system which will be approved by
the FDA and selling such systems to cervical cancer testing laboratories at a satisfactory price.
Our success in cervical disease Cellular Analysis Systems is almost completely dependent on the
success of Sysmex in utilizing our technology and on its ability to educate physicians, patients,
insurers and its distributors about the medical utility of the new products. Even if Sysmex
successfully educates the market, competing products may prevent Sysmex from gaining wide market
acceptance of its products. Our inability to develop and commercialize additional products may adversely affect our
ability to achieve profitability. We believe that our ability to achieve and maintain profitability in the future will be
affected by our progress in producing additional revenue-generating products. Other than the NMP22
products and allergy and other diagnostic products distributed by our European subsidiary, none of
our products is close enough to commercialization to be expected to generate revenue in the
foreseeable future, if at all. If we are unable to successfully develop and commercialize other
products, the future prospects for our business, sales and profits will be materially impaired. In
addition, if we are unable to develop and commercialize additional products and diversify our
revenue streams, greater pressure will be placed on the performance of existing products and our
business success will be directly related to success or failure of these few products. We may incur substantially greater costs and timing delays than we currently expect in the
development process. From time to time, we have encountered unexpected technical obstacles and may encounter
additional ones in the course of the development process that we may not be able to overcome or may
only overcome if we expend additional funds and time. For example, in 1997 we elected to terminate
development of a blood-based Lab Test Kit for PC1, a candidate marker for prostate cancer, due to
unexpected difficulties. Despite encouraging initial results from an earlier low throughput
research testing method, we were unable to develop such a kit for use in testing prostate cancer
patients even when we employed 1997 state-of-the-art detection methods. We have subsequently
announced that a different set of proteins (NMP48), discovered using a different research method,
would be the primary candidates in our prostate cancer program. More recently, we and others have
observed that the testing methodologies of a low throughput research mass spectrometry instrument
are not readily reproducible or transferable to high throughput mass spectrometry instruments.
This has required us to try a number of changes in our procedures to improve controls,
reproducibility and costs in order to measure these proteins. Such changes in our technology and
procedures may result in products or services that cannot reproduce our original discovery results
or that do not perform at all or do not perform as well as the results reported using our discovery
research procedure. The research results we obtain in the laboratory frequently cannot be replicated in clinical
trials. Investors should not expect products that we commercialize to perform as well as preliminary
discovery research results in the small numbers of samples reported by us. In large-scale clinical
trials, such as those required by the FDA, we expect to encounter greater variability and risks
including but not limited to:  
    obtaining acceptable specimens from patients and healthy individuals;
    testing a much larger population of individuals than we tested in early discovery which
will be likely to demonstrate the inherent biologic variability;
    preparing the specimens properly for testing using lower cost, high throughput methods
which may be less reliable than those used in early discovery; and
    developing an economic and reproducible test method for the substance to be measured. We believe that testing the final product in a clinical setting will result in product
performance which may not be as accurate as the results reported from the discovery phase.
Therefore, the best comparative data to be used in evaluating our 24




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product development programs are the results of physician trials of commercial products such as
those reported since 1996 for products based on NMP22 proteins. We have no demonstrated success in developing Proprietary Laboratory Procedures as a
profitable service business and any future success will be dependent upon satisfaction and approval
of our clinical lab partners. We believe the future success of our business will depend not only on the successful
commercialization of our Lab Test Kits and BladderChek Tests, but also in part upon developing a
service business based on Proprietary Laboratory Procedures which will be custom designed to the
instrumentation and techniques of a specific clinical laboratory to measure clinically useful
proteins. We are currently working on development of such Proprietary Laboratory Procedures using
our technologies for breast cancer, but we have no demonstrated success in this area. In addition,
because we expect that use of our Proprietary Laboratory Procedures will likely be confined to a
limited number of licensed clinical laboratories who would be expected to invest in the development
and marketing of a lab testing service specific to their equipment, processes and personnel, the
success of these procedures will be dependent upon acceptance by the applicable laboratories.
Although we may complete our product development efforts to our satisfaction, we may not obtain the
agreement and approval from our clinical lab partner that the technology works adequately in their
laboratory environment or that it has the medical performance and information value that they
originally expected. Because Proprietary Laboratory Procedures utilize technologies which are, by
their nature, more operator-dependent than the technologies involved in products such as Lab Test
Kits and BladderChek Tests, the risks regarding successful commercial acceptance are increased in
this area. Successful technical development of our products does not guarantee successful
commercialization. We may successfully complete technical development for one or all of our product development
programs, but still fail to develop a commercially successful product for a number of other
reasons, such as the following:  
    failure to obtain the required regulatory approvals for their use;
    prohibitive production costs;
    clinical trial results might differ from discovery phase data; and
    variation of perceived value of products from physician to physician. Our success in the market for the diagnostic products we develop will also depend greatly on
our ability to educate physicians, patients, insurers and our distributors on the medical utility
of our new products. Even if we successfully educate the market, competing products may prevent us
from gaining wide market acceptance of our products. If we are unable to manufacture the product volumes we need, we may be unable to achieve
profitability. We have been manufacturing and assembling our Lab Test Kits for commercial sales since 1995
but have not yet manufactured these products in large volumes. We may encounter difficulties in
scaling up production of products, including problems involving:  
    production yields;
    quality control and assurance;
    component supply; and
    shortages of qualified personnel. These problems could make it very difficult to produce sufficient product to satisfy customer
needs and could result in customer dissatisfaction. We may not be able to achieve reliable,
high-volume manufacturing at a commercially reasonable cost. In addition, numerous governmental
authorities extensively regulate our manufacturing operations. Failure to satisfy our future
manufacturing needs could result in decreased sales, loss of market share and potential loss of
certain distribution rights. If we lose the services of our suppliers or assemblers for any reason it may be difficult for
us to find replacements,
we may be forced to modify or cease production of our products and we may be unable to meet
commitments to customers. We currently manufacture our Lab Test Kits and package our BladderChek Tests in our Newton
facility but we rely on subcontractors for certain components and processes for each of these
products. We do not currently have alternative suppliers for certain key components and processes
which are provided by some subcontractors. If the units or components from these 25




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suppliers or the services of these assemblers should become unavailable for any reason,
including their failure to comply with FDA regulations, we would need to seek alternative sources
of supply or assembly. In order to maintain the FDA acceptance of our manufacturing process, we
would have to demonstrate to the FDA that these alternative sources of supply are equivalent to
our current sources. Although we attempt to maintain an adequate level of inventory to provide
for these and other contingencies, if our manufacturing processes are disrupted because key
components are unavailable, because new components must be revalidated or because an assembler
fails to meet our requirements, we may be forced to modify our products to enable another
subcontractor to meet our sales requirements or we may be required to cease production of such
products altogether until we are able to establish an adequate replacement supplier. Disruptive
changes such as these may make us unable to meet our sales commitments to customers. Our failure
or delay in meeting our sales commitments could cause sales to decrease and market share to be
lost permanently, and could result in significant expenses to obtain alternative sources of supply
or assembly with the necessary facilities and know-how. If the products we distribute which are made by other companies should become unavailable or
not meet quality standards, we may lose revenues and market share and may face liability claims. If the products we distribute, but do not manufacture, should become unavailable for any
reason, we would need to seek alternative sources of supply. If we are unable to find alternative
sources of an equivalent product we may be required to cease distribution of this type of product,
which could cause revenues to decrease and market share to be lost permanently. Furthermore, if
products which we distribute, but do not manufacture, should be found defective, we could be sued
for product liability or other claims. During 2003, we received reports from customers that one of the products we sell through our
German subsidiary failed to perform correctly and provided false readings on patients conditions.
We believe the product performance problems have been addressed by the manufacturer of the products
and that the manufacturer has accepted responsibility for defective products. We have not sought
an alternate source of supply for this product line, but we have seen decreased customer demand for
these products during 2004 compared to 2003. Our revenues, profits and market share for these
products may be further adversely affected, and we may face product liability and other claims if
the manufacturer fails to satisfactorily address all issues raised by our customers and the
patients affected. If we are sued for product-related liabilities, the cost could be prohibitive to us. The testing, marketing and sale of human healthcare products entail an inherent exposure to
product liability, and third parties may successfully assert product liability claims against us.
Although we currently have insurance covering our products, we may not be able to maintain this
insurance at acceptable costs in the future, if at all. In addition, our insurance may not be
sufficient to cover large claims. Significant product liability claims could result in large and
unexpected expenses as well as a costly distraction of management resources and potential negative
publicity and reduced demand for our product. Our activities involve the use of hazardous materials, and we may be held liable for any
accidental injury from these hazardous materials. Our research and development and assembly activities involve the controlled use of hazardous
materials, including carcinogenic compounds. Although we believe that our safety procedures for
handling and disposing of our hazardous materials comply with the standards prescribed by federal,
state and local laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we could be held liable
for damages that result, and significant and unexpected costs, including costs related to
liabilities and clean-up, costs from increased insurance premiums or inability to obtain adequate
insurance at a reasonable price and costs from loss of operations during clean-up. If our intellectual property is not adequately protected, we could lose our ability to compete
in the marketplace. Protection of our intellectual property is necessary for the success of our products. Patent
protection can be limited and not all intellectual property is or can be patent protected. We rely
on a combination of patent, trade secret and trademark laws, nondisclosure and other contractual
provisions and technical measures to protect the proprietary rights in our current and planned
products. We have little protection where we must rely on trade secrets and nondisclosure
agreements and our competitors independently develop technologies that are substantially equivalent
or superior to our technology. If our competitors develop such technology and are able to produce
products similar to or better than ours, our market share could be reduced and our revenue
potential may decrease. While we have obtained patents where advisable, patent law relating to the scope of certain
claims in the biotechnology field is still evolving. In some instances we have taken an aggressive
position in seeking patent protection for our inventions 26




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and in those cases the degree of future protection for our proprietary rights is uncertain.
In addition, the laws of certain countries in which our products are, or may be, licensed or sold
do not protect our products and intellectual property rights to the same extent as the laws of the
United States. If our intellectual property infringes on the rights of others, we may be forced to modify or
cease production of our products. We believe that the use of the patents for nuclear matrix protein technology owned by us or
licensed to us and the use of our trademarks and other proprietary rights, do not infringe upon the
proprietary rights of third parties. However, we may not prevail in any challenge of third-party
intellectual property rights, and third parties may successfully assert infringement claims against
us in the future. In addition, we may be unable to acquire licenses to any of these proprietary
rights of third parties on reasonable terms. If our intellectual property is found to infringe
upon other parties proprietary rights and we are unable to come to terms with such parties, we may
be forced to modify our products to make them non-infringing or to cease production of such
products altogether. We may need to stop selling our BladderChek Tests if we cannot obtain a license or a waiver to
use lateral flow technology. Our BladderChek Test uses lateral flow technology consisting of an absorbent material that
will soak up urine from a small reservoir at one end of the container housing the test strip and
expose the urine to chemicals and antibodies arranged on the surface of or imbedded in the test
strip. After a short period of time and after a reaction with our proprietary antibodies, a test
result will appear in a window located on the container housing the test strip. The manufacture,
use, sale, or import of point of care products which include lateral flow technology in certain
jurisdictions will require us to obtain patent licenses. We are currently selling BladderChek
Tests and are attempting to obtain appropriate licenses or waivers. In August, 2004, we entered
into a license agreement, effective as of April 1, 2004, with one holder of patent rights, Abbott
Laboratories, and we are continuing to investigate other licensing arrangements covering our
BladderChek Tests. If we are unable to obtain patent licenses to permit us to make, use, sell, or
import such products in the United States or in certain other jurisdictions, we will have to stop
selling our BladderChek Tests until the expiration of the relevant patents or until we are able to
arrive at a design solution that uses a different technology. In addition, we may also be subject
to litigation that seeks a percentage of the revenues we have received from the sale of our
BladderChek Tests. We accrue estimated royalties on sales of the BladderChek Test based on
estimates of our obligations under existing licensing agreements and, when probable and estimable,
based upon our appraisal of intellectual property claims to which we may be subject. If we are
required to obtain additional licenses we can provide no assurances that additional royalties due
when we complete those licensing agreements will not have an adverse effect on our results of
operations. If we lose or are unable to recruit and retain key management, scientific and sales personnel,
we may be unable to achieve our objectives in a timely fashion. We need to attract and retain highly qualified scientific, sales and management personnel. We
have at any given time only about 70 employees. The loss of multiple members of our key personnel,
such as our scientists or our field sales force, at the same time or within close proximity of each
other, or the failure to recruit the necessary additional personnel when needed with specific
qualifications and on acceptable terms might harm our research and development efforts and/or our
direct-to-the-urologist marketing strategy. We face intense competition for qualified personnel
from other companies, research and academic institutions, government entities and other
organizations. Our success is also greatly dependent on the efforts and abilities of our management team.
The simultaneous loss of multiple members of senior management might delay achievement of our
business objectives due to the time that would be needed for their replacements to be recruited and
become familiar with our business. Market volatility and fluctuations in our stock price and trading volume may cause sudden
decreases in the value of an investment in our common stock. The market price of our common stock has historically been, and we expect it to continue to
be, volatile. This price has ranged between $0.87 and $1.58 in the fifty-two week period ended
March 31, 2005. The stock market has from time to time experienced extreme price and volume
fluctuations, particularly in the biotechnology sector, which have often been unrelated to the
operating performance of particular companies. Factors such as announcements of technological
innovations or new products by our competitors or disappointing results by third parties, as well
as market conditions in our industry, may significantly influence the market price of our common
stock. For example, in the past our stock price has been affected by announcements of clinical
trial results and technical breakthroughs at other biotechnology companies. Our stock price has
also been affected by our own public announcements regarding such things as quarterly earnings,
regulatory agency actions and 27




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corporate partnerships. Consequently, events both within and beyond our control may cause
shares of our stock to lose their value rapidly. In addition, sales of a substantial number of shares of our common stock by stockholders could
adversely affect the market price of our shares. In the first quarter of 2005, our shares had an
average daily trading volume of only approximately 102,000 shares. In connection with our March
2004 private placement of common stock and accompanying warrants, we filed a resale registration
statement covering up to 7,121,031 shares for the benefit of our investors. In 2003, we filed
resale registration statements covering up to 5,371,332 shares for the benefit of our investors in
connection with the sale of Convertible Debentures and accompanying warrants and an additional
approximately 5,419,000 shares for the benefit of our investors in a private placement of common
stock and accompanying warrants. We have also filed resale registration statements in connection
with previous private placements. We filed a resale registration statement covering more than
14,000,000 additional shares for the benefit of our investors in connection with the sale in March
2005 of Series A Convertible Preferred Stock and accompanying warrants. The actual or anticipated
resale by such investors under these registration statements may depress the market price of our
common stock. Bulk sales of shares of our common stock in a short period of time could also cause
the market price for our shares to decline. Future financings will result in additional dilution of the ownership interest of our existing
investors and may have an adverse impact on the price of our common stock. We will need to raise additional capital in the future to continue our operations. The
primary source of the additional capital we raised from 2002 through the first quarter of 2005 has
been equity and convertible debt, and we expect that equity-related instruments will continue to be
our principal source of additional capital. In June 2004, our stockholders approved an increase in
our authorized common stock from 60,000,000 to 90,000,000 shares. This approval provides us with
greater flexibility in undertaking an additional financing without the expense and delay of
obtaining stockholder approval other than as required by state law or American Stock Exchange
requirements for the particular transaction. Any future equity financings will dilute the
ownership interest of our existing investors and may have an adverse impact on the price of our
common stock. In addition, the terms of the Convertible Debentures provide for anti-dilution adjustments.
On October 15, 2003 and on November 6, 2003 we completed a sale of 3,893,295 shares of our common
stock and warrants to purchase 1,362,651 shares of our common stock at a price of $2.45 per share
for an aggregate consideration of $6,501,801 (before cash expenses of approximately $855,000).
This sale was deemed to be a dilutive issuance under the terms of the Convertible Debentures and
our March 2003 Warrants. On March 19, 2004 we completed a sale of 4,858,887 shares of our common
stock and warrants to purchase 1,214,725 shares of our common stock at a price of $2.00 per share
for an aggregate consideration of $6,559,500 (before cash expenses of approximately $713,000).
This sale has also been deemed to be a dilutive issuance under the terms of the Convertible
Debentures and our March 2003 Warrants. As a result, the Convertible Debentures became convertible
into 3,183,902 shares of our common stock at a price of $1.51 per share, representing an increase
of 612,944 shares from the conversion terms of the debenture immediately prior to the transaction. On March 4, 2005, we completed the sale of 670,272 shares of our Series A Convertible
Preferred Stock and accompanying warrants to purchase 4,991,434 of our common stock at a price of
$8.80 per share of Preferred Stock for an aggregate consideration of $5,898,394 (before cash
expenses and commissions estimated to be approximately $573,000). Additional warrants were issued
to a placement agent to purchase 656,920 shares of our common stock at $.147 per share. Each share
of the Series A Convertible Preferred Stock is convertible into ten shares of our common stock,
resulting in a price per share of common stock in this transaction of $.88. This sale was deemed
to be a dilutive issuance under the terms of the Convertible Debentures and our March 2003
Warrants. As a result, the Convertible Debentures became convertible into 2,525,253 shares of our
common stock at a price of $.99 per share, representing an increase of 869,623 shares from the
conversion terms of the Debenture immediately prior to the transaction. The exercise price of the
March 2003 Warrants was also reduced to $.88 per share. If we do a future financing at a price
less than $.88 per common share (the New Base Price), the conversion rate of the Convertible
Debentures will be adjusted down to 112% of the New Base Price and additional shares of our common
stock would be issuable upon such conversion. The terms of the March 2003 Warrants also provide
for anti-dilution protection, so that the exercise price for such warrants would be adjusted down
to the New Base Price in the event of a dilutive financing, or on a weighted-average basis if there
are no longer any Convertible Debentures outstanding. The issuance of additional shares upon
conversion of the Convertible Debentures would result in further dilution of the ownership interest
of our other existing investors, and a decrease in the warrant exercise price may cause a decline
in our stock price. The Series A Convertible Preferred Stock and the warrants issued in connection
with the March 2005 transaction also have anti-dilution protection provisions which would result in
the issuance of additional shares upon conversion of the Convertible Preferred Stock and in a
reduction in the warrant price in the event of a subsequent dilutive financing. 28




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Item 3. Quantitative and Qualitative Disclosures About Market Risk. Investment Portfolio.We own financial instruments that are sensitive to market and interest
rate risks as part of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations including our research and development activities.
None of these market risk sensitive instruments is held for trading purposes. Our investment policy
prohibits investing in derivatives, and we stringently adhere to this policy. The interest rate on
our


Convertible Debentures is fixed and therefore not subject to interest rate risk. It is suggested
that this paragraph be read in conjunction with Note 1 of Notes to the Consolidated Financial
Statements  Operations and Significant Accounting Policies of our Annual Report on Form 10-K for
the year ended December 31, 2004 filed with the SEC (File No. 001-12128). We invest our cash in securities classified as cash and cash equivalents. At March 31, 2005,
these securities totaled $7.8 million and included money market accounts. Changes in interest
rates affect the investment income we earn on our investments and, therefore, impact our cash flows
and results of operations. A hypothetical 50 basis point decrease in interest rates would result
in a decrease in annual interest income and a corresponding increase in net loss of approximately
$8,000 for the three months ended March 31, 2005. Foreign Exchange.The financial statements of Matritech GmbH are translated in accordance with
SFAS No. 52, Foreign Currency Translation. The functional currency of our foreign subsidiary is
the local currency (euro), and accordingly, all assets and liabilities of the foreign subsidiary
are translated using the exchange rate at the balance sheet date except for intercompany
receivables which are of long-term-investment nature, and capital accounts which are translated at
historical rates. Revenues and expenses are translated monthly at the average rate for the month.
Adjustments resulting from the translation from the financial statements of the Matritech GmbH into
U.S. dollars are excluded from the determination of net income and are accumulated in a separate
component of stockholders equity. Foreign currency transaction gains and losses are reported in
the accompanying consolidated statements of operations and are immaterial to the results of
operations. We had sales denominated in foreign currency of approximately $997,000 and $1,334,000
for the three month periods ended March 31, 2004 and 2005, respectively. 
 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls
and procedures were designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were effective. Changes in Internal Control Over Financial Reporting. There was no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings On January 25, 2005, the court dismissed a lawsuit in which we were a third party defendant.
The litigation, brought by a former employee of ours against our landlord, was pending under the
caption Kira Shapiro et al v. Francis Biotti as Trustee of One Nevada Street Realty Trust, Civil
Action No. 02-05439 in Middlesex County Superior Court, Massachusetts. On January 28, 2005, a
stipulation of dismissal covering the third party claims against us was filed with the court.
These dismissals conclude the case. 
 Item 6. Exhibits. Exhibit No:
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 29




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized. MATRITECH, INC. Date: May 12, 2005
    By:
    /s/ Stephen D. ChubbStephen D. ChubbDirector, Chairman and Chief Executive Officer
(principal executive officer) Date: May 12, 2005
    By:
    /s/ Richard A. SandbergRichard A. SandbergDirector, Vice President, Chief Financial
Officer and Treasurer
(principal accounting and financial officer) 30




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EXHIBIT INDEX Exhibit No:
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.