##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 For the quarterly period ended September 30, 2005
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 For the transition period from            to
 Commission file number: 001-12128
 Matritech, Inc.
  Delaware
    
    04-2985132(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 330 Nevada Street, Newton, Massachusetts 02460
 
  (617) 928-0820
 
  Indicate by check mark whether the registrant:
 þ o
 o þ
 o þ




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MATRITECH, INC.
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of December 31, 2004
and September 30, 2005
    
    
    3Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2005
    
    
    4Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2005
    
    
    5Condensed Notes 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
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    36EX-31.1 Section 302 Certification of C.E.O.EX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 MATRITECH, INC.
 
 CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,906,178
    
    
    $
    3,795,194Accounts receivable less allowance of $85,123 in 2004 and $109,222 in 2005
    
    
    884,057
    
    
    
    1,476,893Inventories
    
    
    878,804
    
    
    
    884,171Prepaid expenses and other current assets
    
    
    347,245
    
    
    
    262,954Total current assets
    
    
    7,016,284
    
    
    
    6,419,212Property and equipment, net of accumulated depreciation of $2,343,673 in 2004 and $2,146,519 in 2005
    
    
    914,577
    
    
    
    860,394Goodwill
    
    
    132,615
    
    
    
    132,615Other assets
    
    
    166,416
    
    
    
    220,865Receivable from related party
    
    
    16,104
    
    
    
    3,551Total assets
    
    $
    8,245,996
    
    
    $
    7,636,637LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of notes payable
    
    $
    13,534
    
    
    $
    12,056Current maturities of convertible debt
    
    
    1,390,887
    
    
    
    949,194Accounts payable
    
    
    475,342
    
    
    
    520,591Accrued expenses
    
    
    1,570,588
    
    
    
    1,591,432Deferred revenue
    
    
    386,188
    
    
    
    237,716Total current liabilities
    
    
    3,836,539
    
    
    
    3,310,989Notes payable, less current maturities
    
    
    13,534
    
    
    
    6,028Convertible debt, less current maturities
    
    
    364,236
    
    
    
    Deferred revenue
    
    
    636,775
    
    
    
    629,148Other long term liabilities
    
    
    
    
    
    
    121,379Total liabilities
    
    
    4,851,084
    
    
    
    4,067,544Commitments and ContingenciesSeries A Convertible Preferred Stock, $1.00 par valueAuthorized  4,000,000 sharesDesignated as Series A Convertible Preferred  1,426,124 sharesIssued and oustanding  0 shares in 2004 and 608,853 shares of Series A in 2005
    
    
    
    
    
    
    785,068Liquidation preference of $0 and $5,357,906 for Series A as of December 31, 2004 and
September 30, 2005, respectively
    
    
    
    785,068Stockholders Equity:Common stock, $0.01 par valueAuthorized90,000,000 shares in 2004 and 2005Issued and outstanding43,014,543 shares in 2004 and 46,068,615 shares in 2005
    
    
    430,145
    
    
    
    460,685Additional paid-in capital
    
    
    92,944,400
    
    
    
    98,015,264Accumulated other comprehensive income
    
    
    142,399
    
    
    
    77,056Accumulated deficit
    
    
    (90,122,032
    )
    
    
    (95,768,980
    )Total stockholders equity
    
    
    3,394,912
    
    
    
    2,784,025Total liabilities and stockholders equity
    
    $
    8,245,996
    
    
    $
    7,636,637
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##### Table of Contents



MATRITECH, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenue:Product sales, net of allowances
    
    $
    1,874,988
    
    
    $
    2,751,657
    
    
    
    4,892,739
    
    
    $
    7,513,864Alliance and collaboration revenue
    
    
    60,417
    
    
    
    27,979
    
    
    
    158,322
    
    
    
    83,414Total revenue
    
    
    1,935,405
    
    
    
    2,779,636
    
    
    
    5,051,061
    
    
    
    7,597,278Expenses:Cost of product sales
    
    
    596,501
    
    
    
    752,346
    
    
    
    1,781,667
    
    
    
    2,247,579Research, development and clinical expense
    
    
    661,978
    
    
    
    748,494
    
    
    
    2,067,757
    
    
    
    2,181,279Selling, general and administrative expense
    
    
    2,664,668
    
    
    
    3,013,321
    
    
    
    7,716,691
    
    
    
    9,103,138Total operating expenses
    
    
    3,923,147
    
    
    
    4,514,161
    
    
    
    11,566,115
    
    
    
    13,531,996Loss from operations
    
    
    (1,987,742
    )
    
    
    (1,734,525
    )
    
    
    (6,515,054
    )
    
    
    (5,934,718
    )Interest income
    
    
    24,313
    
    
    
    31,289
    
    
    
    73,339
    
    
    
    100,744Interest expense
    
    
    (756,410
    )
    
    
    (497,180
    )
    
    
    (2,191,629
    )
    
    
    (1,772,763
    )Mark-to-market adjustment from warrants
    
    
    
    
    
    
    (27,204
    )
    
    
    
    
    
    
    1,899,698Gain on sale of fixed assets
    
    
    
    
    
    
    60,091
    
    
    
    
    
    
    
    60,091Net loss
    
    $
    (2,719,839
    )
    
    $
    (2,167,529
    )
    
    $
    (8,633,344
    )
    
    $
    (5,646,948
    )Beneficial conversion feature related to series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,627,232
    )Net loss attributable to common shareholders
    
    $
    (2,719,839
    )
    
    $
    (2,167,529
    )
    
    
    (8,633,344
    )
    
    $
    (7,274,180
    )Basic and diluted net loss per common share
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    
    (0.22
    )
    
    $
    (0.16
    )Basic and diluted weighted average number of common shares outstanding
    
    
    42,116,886
    
    
    
    45,370,972
    
    
    
    40,109,535
    
    
    
    44,345,812
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MATRITECH, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months EndedSeptember 30,2004
    
    
    2005Cash Flows from Operating Activities:Net loss
    
    $
    (8,633,344
    )
    
    $
    (5,646,948
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    177,713
    
    
    
    182,355Amortization of debt discount
    
    
    1,649,705
    
    
    
    1,366,868Amortization of deferred charges
    
    
    165,617
    
    
    
    95,862Issuance of common stock for interest on debt
    
    
    289,275
    
    
    
    130,966Noncash interest expense
    
    
    116,546
    
    
    
    177,643Mark-to-market adjustment on warrants
    
    
    
    
    
    
    (1,899,698
    )Gain on sale of fixed assets
    
    
    
    
    
    
    (60,091
    )Changes in assets and liabilities:Accounts receivable
    
    
    (225,489
    )
    
    
    (610,166
    )Inventories
    
    
    (222,742
    )
    
    
    (46,563
    )Prepaid expenses and other assets
    
    
    (77,559
    )
    
    
    (66,020
    )Accounts payable
    
    
    263,530
    
    
    
    54,642Accrued expenses and other liabilities
    
    
    598,599
    
    
    
    187,608Deferred revenue
    
    
    (58,376
    )
    
    
    (156,099
    )Net cash used in operating activities
    
    
    (5,956,525
    )
    
    
    (6,289,641
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (163,305
    )
    
    
    (137,178
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    60,091Net cash used in investing activities
    
    
    (163,305
    )
    
    
    (77,087
    )Cash Flows from Financing Activities:Payments on notes payable
    
    
    (288,956
    )
    
    
    (6,120
    )Proceeds from sale of preferred stock and warrants, net
    
    
    
    
    
    
    5,287,721Proceeds from sale of common stock and warrants, net
    
    
    5,846,969
    
    
    
    Proceeds from issuance of common stock under employee stock purchase plan
    
    
    9,000
    
    
    
    6,226Proceeds from exercise of common stock options
    
    
    84,000
    
    
    
    Net cash provided by financing activities
    
    
    5,651,013
    
    
    
    5,287,827Effect of foreign exchange on cash and cash equivalents
    
    
    (13,250
    )
    
    
    (32,083
    )Decrease in cash and cash equivalents
    
    
    (482,067
    )
    
    
    (1,110,984
    )Cash and cash equivalents, beginning of period
    
    
    7,518,124
    
    
    
    4,906,178Cash and cash equivalents, end of period
    
    $
    7,036,057
    
    
    $
    3,795,194Supplemental Cash Flow Information:Cash paid during the year for interest
    
    $
    7,985
    
    
    $
    1,425Non-cash dividend to preferred stockholders arising from the beneficial conversion feature
    
    
    
    
    
    $
    1,627,232Issuance of common stock as payment on debt
    
    
    1,746,881
    
    
    
    2,433,656Conversion of preferred stock to common stock
    
    
    
    
    
    
    61,419
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##### Table of Contents



MATRITECH, INC.
 
 CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Basis of Presentation
   2. Summary of Significant Accounting Policies
 (a) Principles of Consolidation
  (b) Inventories
  December 31,
    
    
    September 30,2004
    
    
    2005Raw materials
    
    $
    169,708
    
    
    $
    188,660Work-in-process
    
    
    7,975
    
    
    
    17,069Finished goods
    
    
    655,739
    
    
    
    637,215Consignment inventory
    
    
    45,382
    
    
    
    41,227$
    878,804
    
    
    $
    884,171
 (c) Revenue Recognition
 6




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##### Table of Contents



December 31,
    
    
    September 30,2004
    
    
    2005Collaboration fees
    
    $
    737,885
    
    
    $
    707,575Deferred product revenue
    
    
    285,078
    
    
    
    159,289$
    1,022,963
    
    
    $
    866,864
 d) Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net loss
    
    $
    (2,719,839
    )
    
    $
    (2,167,529
    )
    
    $
    (8,633,344
    )
    
    $
    (5,646,948
    )Other comprehensive lossForeign currency translation adjustments
    
    
    4,202
    
    
    
    (5,265
    )
    
    
    (7,788
    )
    
    
    (65,344
    )Comprehensive loss
    
    $
    (2,715,637
    )
    
    $
    (2,172,794
    )
    
    $
    (8,641,132
    )
    
    $
    (5,712,292
    )
 (e) Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based
Compensation, Accounting for Stock-Based Compensation
 Transition and Disclosure
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net loss attributable to common shareholders
    
    $
    (2,719,839
    )
    
    $
    (2,167,529
    )
    
    $
    (8,633,344
    )
    
    $
    (7,274,180
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (162,881
    )
    
    
    (162,740
    )
    
    
    (521,137
    )
    
    
    (529,274
    )Pro forma net loss
    
    $
    (2,882,720
    )
    
    $
    (2,330,269
    )
    
    $
    (9,154,481
    )
    
    $
    (7,803,454
    )Net loss per common share:Basic and diluted  as reported
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.22
    )
    
    $
    (0.16
    )Basic and diluted  pro forma
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    (0.23
    )
    
    $
    (0.18
    )
  7




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##### Table of Contents



Three Months EndedSeptember 30,2004
    
    
    2005Risk-free interest rate
    
    
    3.74  4.69
    %
    
    
    3.72  3.93
    %Expected dividend yield
    
    
    
    
    
    
    Expected life
    
    
    5 years
    
    
    
    5 yearsExpected volatility
    
    
    85
    %
    
    
    68
    %
 (f) Net Loss per Common Share
 Earnings per Share
 (g) Recent Accounting Pronouncements
 Accounting Changes and Error Corrections Accounting Changes, Reporting
Accounting Changes in Interim Financial Statementsan amendment of APB Opinion No. 28.
 Share-Based Payments, Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
 3. Stockholders Equity
  8




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Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled in a Companys Own Stock,
 9




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##### Table of Contents



4. Convertible Debt
  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
    
    
    (3,654,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    4,161,000Balance, September 30, 2005
    
    $
    949,000
    2005
    
    $
    603,0002006
    
    
    777,000Total payments
    
    
    1,380,000
 10




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##### Table of Contents



Less: Portion related to periodic interest payments
    
    
    (34,000
    )Non-cash interest related to debt discount
    
    
    (397,000
    )Balance, September 30, 2005
    
    
    949,000Less current portion
    
    
    949,000Long-term portion
    
    
    
   5. Contingencies
 Intellectual Property Rights
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
  11




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##### Table of Contents



Results of Operations
 Quarter Ended September 30, 2004 (Q3 2004) Compared with Quarter Ended September 30, 2005
(Q3 2005)
 Revenues
 Q3 2004
    
    
    Q3 2005
    
    
    $ Change
    
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    1,197,000
    
    
    $
    2,094,000
    
    
    $
    897,000
    
    
    
    75
    %NMP22 Lab Test Kit Sales
    
    
    249,000
    
    
    
    233,000
    
    
    
    (16,000
    )
    
    
    (6
    %)Other Product Sales
    
    
    429,000
    
    
    
    425,000
    
    
    
    (4,000
    )
    
    
    (1
    %)Total Product Sales
    
    
    1,875,000
    
    
    
    2,752,000
    
    
    
    877,000
    
    
    
    47
    %Alliance and Collaboration Revenue
    
    
    60,000
    
    
    
    28,000
    
    
    
    (32,000
    )
    
    
    (53
    %)Total Revenue
    
    $
    1,935,000
    
    
    $
    2,780,000
    
    
    $
    845,000
    
    
    
    44
    %
    12




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##### Table of Contents



December 31, 2004
    
    
    September 30, 2005
    
    
    $ Change
    
    
    % ChangeCollaboration fees
    
    $
    738,000
    
    
    $
    708,000
    
    
    $
    (30,000
    )
    
    
    (4
    %)Deferred product revenue
    
    
    285,000
    
    
    
    159,000
    
    
    
    (126,000
    )
    
    
    (44
    %)$
    1,023,000
    
    
    $
    867,000
    
    
    $
    (156,000
    )
    
    
    (15
    %)
 Cost of Product Sales
 Q3 2004
    
    
    Q3 2005
    
    
    $ Change
    
    
    % ChangeProduct Sales
    
    $
    1,875,000
    
    
    $
    2,752,000
    
    
    $
    877,000
    
    
    
    47
    %Cost of Product Sales
    
    
    597,000
    
    
    
    752,000
    
    
    
    155,000
    
    
    
    26
    %Gross Profit
    
    $
    1,278,000
    
    
    $
    2,000,000
    
    
    $
    722,000
    
    
    
    56
    %Gross Profit Margin
    
    
    68
    %
    
    
    73
    %
  Research and Development and Clinical Expenses
 Q3 2004
    
    Q3 2005
    
    $ Change
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    662,000
    
    
    $
    748,000
    
    
    $
    86,000
    
    
    
    13
    %
  Selling, General and Administrative Expenses
 Q3 2004
    
    Q3 2005
    
    $ Change
    
    % ChangeGross Profit
    
    $
    1,278,000
    
    
    $
    2,000,000
    
    
    $
    722,000
    
    
    
    56
    %Selling, General and
Administrative Expenses
    
    
    2,665,000
    
    
    
    3,013,000
    
    
    
    348,000
    
    
    
    13
    %SG&A as % of Gross Profit
    
    
    209
    %
    
    
    151
    %
   Operating Loss
 Q3 2004
    
    Q3 2005
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    1,988,000
    
    
    $
    1,735,000
    
    
    $
    (253,000
    )
    
    
    (13
    %)
 13




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##### Table of Contents



Interest Income
 Q3 2004
    
    Q3 2005
    
    $ Change
    
    % ChangeInterest Income
    
    $
    24,000
    
    
    $
    31,000
    
    
    $
    7,000
    
    
    
    29
    %
  Interest Expense
 Q3 2004
    
    
    Q3 2005
    
    
    $ Change
    
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    69,000
    
    
    $
    29,000
    
    
    $
    (40,000
    )
    
    
    (58
    %)Non-Cash Charges to Interest Expense
    
    
    685,000
    
    
    
    468,000
    
    
    
    (217,000
    )
    
    
    (32
    %)Total
    
    
    754,000
    
    
    
    497,000
    
    
    
    (257,000
    )
    
    
    (34
    %)Interest Related to Other Debt:Interest Paid in Cash
    
    
    2,000
    
    
    
    
    
    
    
    (2,000
    )
    
    
    (100
    %)Total Interest
    
    $
    756,000
    
    
    $
    497,000
    
    
    $
    (259,000
    )
    
    
    (34
    %)
    
    
    $24,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $23,000 at September 30,
2005;
    
    $59,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash;
    
    $384,000 of amortized debt discount, which contributed to reducing the $4,558,000
of debt discount on our $5,000,000 note to $397,000 at September 30, 2005. This
debt discount comprises 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.
  14




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Value ofDebenturesOriginal 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
    
    
    1,367,000Payment in Stock
    
    
    (1,731,000
    )Carrying Value of Debt at 9/30/05
    
    $
    949,000
 We may not be able to meet our payment obligations on our debt if
we are required to make these payments in cash.
 Net Loss
 Q3 2004
    
    Q3 2005
    
    $ Change
    
    % ChangeNet Loss
    
    $
    2,720,000
    
    
    $
    2,168,000
    
    
    $
    (552,000
    )
    
    
    (20
    %)
  Nine Months Ended September 30, 2004 Compared with Nine Months Ended September 30, 2005
 Revenues
 Nine Months
    
    
    Nine MonthsEnded September
    
    
    Ended September30, 2004
    
    
    30, 2005
    
    
    $ Change
    
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    2,834,000
    
    
    $
    5,433,000
    
    
    $
    2,599,000
    
    
    
    92
    %NMP22 Lab Test Kit Sales
    
    
    679,000
    
    
    
    608,000
    
    
    
    (71,000
    )
    
    
    (10
    %)Other Product Sales
    
    
    1,380,000
    
    
    
    1,473,000
    
    
    
    93,000
    
    
    
    7
    %Total Product Sales
    
    
    4,893,000
    
    
    
    7,514,000
    
    
    
    2,621,000
    
    
    
    54
    %Alliance and Collaboration Revenue
    
    
    158,000
    
    
    
    83,000
    
    
    
    (75,000
    )
    
    
    (47
    %)Total Revenue
    
    $
    5,051,000
    
    
    $
    7,597,000
    
    
    $
    2,546,000
    
    
    
    50
    %
  15




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##### Table of Contents



December 31, 2004
    
    
    September 30, 2005
    
    
    $ Change
    
    
    % ChangeCollaboration fees
    
    $
    738,000
    
    
    $
    708,000
    
    
    $
    (30,000
    )
    
    
    (4
    %)Deferred product revenue
    
    
    285,000
    
    
    
    159,000
    
    
    
    (126,000
    )
    
    
    (44
    %)$
    1,023,000
    
    
    $
    867,000
    
    
    $
    (156,000
    )
    
    
    (15
    %)
 Cost of Product Sales
 Nine Months
    
    
    Nine MonthsEnded September
    
    
    Ended September30, 2004
    
    
    30, 2005
    
    
    $ Change
    
    
    % ChangeProduct Sales
    
    $
    4,893,000
    
    
    $
    7,514,000
    
    
    $
    2,621,000
    
    
    54%Cost of Product Sales
    
    
    1,782,000
    
    
    
    2,248,000
    
    
    
    466,000
    
    
    26%Gross Profit
    
    $
    3,111,000
    
    
    $
    5,266,000
    
    
    $
    2,155,000
    
    
    69%Gross Profit Margin
    
    
    64
    %
    
    
    70
    %
  Research and Development and Clinical Expenses
 Nine Months
    
    Nine MonthsEnded September
    
    Ended September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    2,068,000
    
    
    $
    2,181,000
    
    
    $
    113,000
    
    
    
    5
    %
  Selling, General and Administrative Expenses
 Nine Months Ended
    
    Nine Months EndedSeptember
    
    September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeGross Profit
    
    $
    3,111,000
    
    
    $
    5,266,000
    
    
    $
    2,155,000
    
    
    
    69
    %Selling, General and
Administrative Expenses
    
    
    7,717,000
    
    
    
    9,103,000
    
    
    
    1,386,000
    
    
    
    18
    %SG&A as % of Gross Profit
    
    
    248
    %
    
    
    173
    %
 16




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##### Table of Contents



Operating Loss
 Nine Months
    
    Nine MonthsEnded September
    
    Ended September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    6,515,000
    
    
    $
    5,935,000
    
    
    $
    (580,000
    )
    
    
    (9
    %)
  Interest Income
 Nine Months
    
    Nine MonthsEnded September
    
    Ended September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeInterest Income
    
    $
    73,000
    
    
    $
    101,000
    
    
    $
    28,000
    
    
    
    38
    %
  Interest Expense
 Nine Months
    
    
    Nine MonthsEnded September
    
    
    Ended September30, 2004
    
    
    30, 2005
    
    
    $ Change
    
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    256,000
    
    
    $
    119,000
    
    
    $
    (137,000
    )
    
    (54%)Non-Cash Charges to Interest Expense
    
    
    1,927,000
    
    
    
    1,653,000
    
    
    
    (274,000
    )
    
    (14%)Total
    
    $
    2,183,000
    
    
    $
    1,772,000
    
    
    $
    (411,000
    )
    
    (19%)Interest Related to Other Debt:Interest Paid in Cash
    
    $
    8,000
    
    
    $
    1,000
    
    
    $
    (7,000
    )
    
    (88%)Total Interest
    
    $
    2,191,000
    
    
    $
    1,773,000
    
    
    $
    (418,000
    )
    
    (19%)
   
    
    $96,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $23,000 at September 30,
2005;
    
    $189,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash;
    
    $1,367,000 of amortized debt discount, which contributed to reducing the
$4,558,000 of debt discount on our $5,000,000 note to $397,000 at September 30,
2005. This debt discount comprises 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
 17




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##### Table of Contents



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.
 Mark-to-market adjustment from warrants
 Nine Months
    
    Nine MonthsEnded September
    
    Ended September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeMark-to-market
Adjustment From
Warrants
    
    
    
    
    
    $
    1,900,000
    
    
    $
    1,900,000
    
    
    
    100
    %
  Net Loss
 Nine Months
    
    Nine MonthsEnded September
    
    Ended September30, 2004
    
    30, 2005
    
    $ Change
    
    % ChangeNet Loss
    
    $
    8,633,000
    
    
    $
    5,647,000
    
    
    $
    (2,986,000
    )
    
    
    (35
    %)Net Loss Attributable to Common Shareholders
    
    $
    8,633,000
    
    
    $
    7,274,000
    
    
    $
    (1,359,000
    )
    
    
    (16
    %)
  Liquidity and Capital Resources
  Summary Cash Flow
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2004
    
    
    September 30, 2005Net Loss
    
    $
    (8,633,000
    )
    
    $
    (5,647,000
    )Non-cash Charges
    
    
    2,398,000
    
    
    
    (6,000
    )Changes in Assets and Liabilities
    
    
    278,000
    
    
    
    (637,000
    )Net Operating Uses
    
    
    (5,957,000
    )
    
    
    (6,290,000
    )Net Investment Uses
    
    
    (163,000
    )
    
    
    (77,000
    )Net Financing Sources
    
    
    5,651,000
    
    
    
    5,288,000Foreign exchange effect
    
    
    (13,000
    )
    
    
    (32,000
    )Change in cash and cash
equivalents
    
    $
    (482,000
    )
    
    $
    (1,111,000
    )
  18




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##### Table of Contents



Financings
  Common
    
    
    ConversionSecurity
    
    Shares
    
    
    Or Exercise PriceLow
    
    HighCommon stock outstanding
    
    
    46,069,000
    
    
    
    
    
    
    
    Stock reserved for converting debentures
    
    
    1,360,000
    
    
    $
    .99
    
    
    $
    .99Stock reserved for warrant exercises
    
    
    10,213,000
    
    
    
    .88
    
    
    
    2.70Stock reserved for outstanding stock options
    
    
    3,107,000
    
    
    
    .60
    
    
    
    13.13Stock reserved for Series A Preferred Stock
    
    
    6,089,000
    
    
    
    .88
    
    
    
    .88Total
    
    
    66,838,000
   Financings
  19




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##### Table of Contents



Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled in a Companys Own Stock,
 20




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##### Table of Contents



Off Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
 Accounting Changes and Error Corrections Accounting Changes, Reporting
Accounting Changes in Interim Financial Statementsan amendment of APB Opinion No. 28.
 21




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##### Table of Contents



Share-Based Payments, Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
 Research and Development
   Development Programs
  Tech-
    
    Clinicalnology
    
    Applica-
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationProgram
    
    Format
    
    tion
    
    Development
    
    Status
    
    Competitive Products (1)
    
    Arrangements (2) (3)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
 22




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##### Table of Contents



Tech-
    
    Clinicalnology
    
    Applica-
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationProgram
    
    Format
    
    tion
    
    Development
    
    Status
    
    Competitive Products (1)
    
    Arrangements (2) (3)NMP179® Cervical
    
    Automated Cellular
Analysis System
    
    Screening
    
    Licensee Sysmex is
conducting further
pre-clinical trials
    
    Not yet submitted
    
    FocalPoint slide profiler,
Imaging-Directed Cytology
    
    (1) Sysmex  World 
Manufacturer and
Marketer for Non-
Slide-Based SystemNMP66TM
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, have not
produced cumulative revenues in excess of $500,000 and do not have
rights other than those of a conventional distributor.3
    
    We terminated our Product Supply and Marketing Agreement with Diagnostic Products Corporation effective December 31, 2005. Spending on Research and Development Projects.
 NMP22  Bladder.
 NMP179  Cervical.
 Breast Cancer.
 Prostate Cancer
 Other existing programs
 Factors That May Affect Future Results
 23




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We have a history of operating losses, are continuing to lose money and may never be profitable.
  1st 9 months2002
    
    2003
    
    2004
    
    2005Product Sales
    
    $
    3,094,000
    
    
    $
    4,018,000
    
    
    $
    7,275,000
    
    
    $
    7,514,000Net Losses
    
    $
    8,278,000
    
    
    $
    7,878,000
    
    
    $
    11,123,000
    
    
    $
    5,647,000
  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 may not be able to meet our payment obligations on our debt if we are required to make
these payments in cash.
   24




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##### Table of Contents




    
    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.
  
    
    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.
 We may fail to meet the standards for continued listing of our shares of common stock on the
American Stock Exchange or for listing of such shares on another national exchange.
  Our operating expenses have significantly increased to support a larger employee sales force
and to pay for order processing, shipping and collection costs normally borne by distributors, and
additional cash will be needed to finance the accounts receivable from physician practices that
likely will be collected over a longer cycle.
  25




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##### Table of Contents



If we are unable to manufacture or otherwise obtain the product volumes we need, we may be
unable to achieve profitability.
  
    
    production yields;
    
    quality control and assurance;
    
    component supply; and
    
    shortages of qualified personnel.
  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 may need to stop selling our BladderChek Tests if we cannot obtain necessary licenses or
waivers to use lateral flow technology, and we may need to stop selling other products if third
parties assert infringement claims against us.
  26




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##### Table of Contents



Our inability to develop and commercialize additional products may adversely affect our
ability to achieve profitability.
  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.
  TM
 Low reimbursement rates could limit the per-product revenues for our products and make it
uneconomical to sell or distribute them, and limitations on the medical circumstances for which
reimbursement is provided could reduce the potential market for our products.
  27




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28




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##### Table of Contents



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.
   
    
    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.
  
    
    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.
    29




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##### Table of Contents



We may be unable to establish and maintain relationships with key distributors that could
achieve substantial market penetration for our products, including the BladderChek Test, in
jurisdictions where we do not have a direct sales force.
  We have no demonstrated success in developing cellular analysis systems and any future success
in this area will be highly dependent upon Sysmex.
  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 may incur substantially greater costs and timing delays than we currently expect in the
development process.
  The research results we obtain in the laboratory frequently cannot be replicated in clinical
trials.
 30




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##### Table of Contents




    
    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 might perform differently than those used in early discovery; and
    
    developing an economic and reproducible test method for the substance to be measured.
  Successful technical development of our products does not guarantee successful
commercialization.
  
    
    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.
  If our intellectual property is not adequately protected, we could lose our ability to compete
in the marketplace.
   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.
  31




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##### Table of Contents



The operations of our European subsidiary involve currency exchange variability and other
risks .
   If we are sued for product-related liabilities, the cost could be prohibitive to us.
  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.
   Our activities involve the use of hazardous materials, and we may be held liable for any
accidental injury from these hazardous materials.
  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.
  32




---



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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.
    33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Investment Portfolio.
  Foreign Exchange. Foreign Currency Translation
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 
 PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 6. Exhibits.
 34




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##### Table of Contents



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.
 35




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##### Table of Contents



SIGNATURES
  MATRITECH, INC.Date: November 9, 2005
    By:
    /s/ Stephen D. ChubbStephen D. ChubbDirector, Chairman and Chief Executive Officer
(principal executive officer)Date: November 9, 2005
    By:
    /s/ Richard A. SandbergRichard A. SandbergDirector, Vice President, Chief Financial
Officer and Treasurer

(principal accounting and financial officer) 36




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##### Table of Contents



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.
 37