##### 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 June 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           toCommission 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




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MATRITECH, INC.
 INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2005
    
    
    4Consolidated Statements of Cash Flows for the three and six months ended June 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
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32PART II
    
    OTHER INFORMATIONItem 6. Exhibits
    
    
    32SIGNATURES
    
    
    34EX-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




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 MATRITECH, INC.
 
 CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    June 30,2004
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,906,178
    
    
    $
    5,579,907Accounts receivable less allowance of $85,123 in 2004 and $134,643 in 2005
    
    
    884,057
    
    
    
    1,149,508Inventories, net
    
    
    878,804
    
    
    
    810,920Prepaid expenses and other current assets
    
    
    347,245
    
    
    
    329,311Total current assets
    
    
    7,016,284
    
    
    
    7,869,646Property and equipment, net of accumulated depreciation of $2,343,673 in 2004 and $2,409,076 in 2005
    
    
    914,577
    
    
    
    903,758Goodwill
    
    
    132,615
    
    
    
    132,615Other assets
    
    
    166,416
    
    
    
    204,705Receivable from related party
    
    
    16,104
    
    
    
    9,657Total assets
    
    $
    8,245,996
    
    
    $
    9,120,381LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of notes payable
    
    $
    13,534
    
    
    $
    12,097Current maturities of convertible debt
    
    
    1,390,887
    
    
    
    1,142,019Accounts payable
    
    
    475,342
    
    
    
    506,849Accrued expenses
    
    
    1,570,588
    
    
    
    1,330,327Deferred revenue
    
    
    386,188
    
    
    
    335,468Total current liabilities
    
    
    3,836,539
    
    
    
    3,326,760Notes payable, less current maturities
    
    
    13,534
    
    
    
    6,049Convertible debt, less current maturities
    
    
    364,236
    
    
    
    Deferred revenue
    
    
    636,775
    
    
    
    652,190Other long term liabilities
    
    
    
    
    
    
    89,394Total liabilities
    
    
    4,851,084
    
    
    
    4,074,393Commitments and ContingenciesSeries A Convertible Preferred Stock, $1.00 par valueAuthorized  4,000,000 sharesIssued  no shares in 2004 and 670,272 in 2005; Outstanding  no shares in 2004and 643,568 in 2005; Liquidation preference of $0 and $5,663,398 as of June 30,
2004 and 2005, respectively
    
    
    
    
    
    
    842,614
    
    
    
    842,614Stockholders Equity:Common stock, $0.01 par valueAuthorized90,000,000 shares in 2004 and 2005Issued and outstanding43,014,543 shares in 2004 and 44,708,282 shares in 2005
    
    
    430,145
    
    
    
    447,082Additional paid-in capital
    
    
    92,944,400
    
    
    
    97,275,422Accumulated other comprehensive income
    
    
    142,399
    
    
    
    82,321Accumulated deficit
    
    
    (90,122,032
    )
    
    
    (93,601,451
    )Total stockholders equity
    
    
    3,394,912
    
    
    
    4,203,374Total liabilities and stockholders equity
    
    $
    8,245,996
    
    
    $
    9,120,381




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##### Table of Contents



MATRITECH, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Revenue:Product sales, net of allowances
    
    $
    1,632,079
    
    
    $
    2,619,022
    
    
    $
    3,017,751
    
    
    $
    4,762,206Alliance and collaboration revenue
    
    
    49,950
    
    
    
    24,751
    
    
    
    97,905
    
    
    
    55,436Total revenue
    
    
    1,682,029
    
    
    
    2,643,773
    
    
    
    3,115,656
    
    
    
    4,817,642Expenses:Cost of product sales
    
    
    645,790
    
    
    
    777,208
    
    
    
    1,185,166
    
    
    
    1,495,233Research, development and clinical expense
    
    
    690,333
    
    
    
    703,035
    
    
    
    1,405,779
    
    
    
    1,432,785Selling, general and administrative expense
    
    
    2,783,028
    
    
    
    3,198,296
    
    
    
    5,052,023
    
    
    
    6,089,816Total operating expenses
    
    
    4,119,151
    
    
    
    4,678,539
    
    
    
    7,642,968
    
    
    
    9,017,834Loss from operations
    
    
    (2,437,122
    )
    
    
    (2,034,766
    )
    
    
    (4,527,312
    )
    
    
    (4,200,192
    )Interest income
    
    
    29,068
    
    
    
    42,079
    
    
    
    49,026
    
    
    
    69,454Interest expense
    
    
    (813,207
    )
    
    
    (603,933
    )
    
    
    (1,435,219
    )
    
    
    (1,275,583
    )Mark-to-market adjustment from warrants
    
    
    
    
    
    
    1,212,598
    
    
    
    
    
    
    
    1,926,902Net loss
    
    $
    (3,221,261
    )
    
    $
    (1,384,022
    )
    
    $
    (5,913,505
    )
    
    $
    (3,479,419
    )Beneficial conversion feature related to
series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,627,232
    )Net loss attributable to common shareholders
    
    $
    (3,221,261
    )
    
    $
    (1,384,022
    )
    
    $
    (5,913,505
    )
    
    $
    (5,106,651
    )Basic and diluted net loss per common share
    
    $
    (0.08
    )
    
    $
    (0.03
    )
    
    
    (0.15
    )
    
    $
    (0.12
    )Basic and diluted weighted average number of common shares outstanding
    
    
    41,473,897
    
    
    
    44,178,048
    
    
    
    39,084,829
    
    
    
    43,824,736




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##### Table of Contents



MATRITECH, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months EndedJune 30,2004
    
    2005Cash Flows from Operating Activities:Net loss
    
    $
    (5,913,505
    )
    
    $
    (3,479,419
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    112,033
    
    
    
    120,339Amortization of debt discount
    
    
    1,080,414
    
    
    
    982,769Amortization of deferred charges
    
    
    114,777
    
    
    
    71,313Issuance of common stock for interest on debt
    
    
    187,340
    
    
    
    107,991Noncash interest expense
    
    
    46,628
    
    
    
    119,664Mark-to-market adjustment on warrants
    
    
    
    
    
    
    (1,926,902
    )Changes in assets and liabilities:Accounts receivable
    
    
    (254,423
    )
    
    
    (288,058
    )Inventories
    
    
    (14,809
    )
    
    
    27,833Prepaid expenses and other assets
    
    
    (66,457
    )
    
    
    (91,668
    )Accounts payable
    
    
    242,527
    
    
    
    40,638Accrued expenses and other liabilities
    
    
    505,967
    
    
    
    (117,260
    )Deferred revenue
    
    
    (21,406
    )
    
    
    (35,305
    )Net cash used in operating activities
    
    
    (3,980,914
    )
    
    
    (4,468,065
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (120,485
    )
    
    
    (118,340
    )Net cash used in investing activities
    
    
    (120,485
    )
    
    
    (118,340
    )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
    
    
    
    6,226Net cash provided by financing activities
    
    
    5,567,013
    
    
    
    5,287,827Effect of foreign exchange on cash and cash equivalents
    
    
    (16,233
    )
    
    
    (27,693
    )Increase in cash and cash equivalents
    
    
    1,449,381
    
    
    
    673,729Cash and cash equivalents, beginning of period
    
    
    7,518,124
    
    
    
    4,906,178Cash and cash equivalents, end of period
    
    $
    8,967,505
    
    
    $
    5,579,907Supplemental Cash Flow Information:Cash paid during the year for interest
    
    $
    6,686
    
    
    $
    1,059Non-cash dividend to preferred stockholders arising from the beneficial conversion feature
    
    
    
    
    
    $
    1,627,232Issuance of common stock as payment on debt
    
    
    703,754
    
    
    
    1,420,473Conversion of preferred stock to common stock
    
    
    
    
    
    
    26,704




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##### Table of Contents



MATRITECH, INC.
 
 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,
    
    June 30,2004
    
    2005Raw materials
    
    $
    169,708
    
    
    $
    218,456Work-in-process
    
    
    7,975
    
    
    
    17,158Finished goods, net
    
    
    655,739
    
    
    
    525,297Consignment inventory
    
    
    45,382
    
    
    
    50,009$
    878,804
    
    
    $
    810,920




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##### Table of Contents



(c) Revenue Recognition
  December 31,
    
    June 30,2004
    
    2005Collaboration fees
    
    $
    737,885
    
    
    $
    735,147Deferred product revenue
    
    
    285,078
    
    
    
    252,511$
    1,022,963
    
    
    $
    987,658
 d) Comprehensive Loss
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net loss
    
    $
    (3,221,261
    )
    
    $
    (1,384,022
    )
    
    $
    (5,913,505
    )
    
    $
    (3,479,419
    )Other comprehensive lossForeign currency translation adjustments
    
    
    (3,453
    )
    
    
    (50,296
    )
    
    
    (11,990
    )
    
    
    (60,078
    )Comprehensive loss
    
    $
    (3,224,714
    )
    
    $
    (1,434,318
    )
    
    $
    (5,925,495
    )
    
    $
    (3,539,497
    )
 (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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net loss attributable to common shareholders
    
    $
    (3,221,261
    )
    
    $
    (1,384,022
    )
    
    $
    (5,913,505
    )
    
    $
    (5,106,651
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (160,878
    )
    
    
    (187,372
    )
    
    
    (358,257
    )
    
    
    (366,534
    )Pro forma net loss
    
    $
    (3,382,139
    )
    
    $
    (1,571,394
    )
    
    $
    (6,271,762
    )
    
    $
    (5,473,185
    )Net loss per common share:Basic and diluted  as reported
    
    $
    (0.08
    )
    
    $
    (0.03
    )
    
    $
    (0.15
    )
    
    $
    (0.12
    )Basic and diluted  pro forma
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
    
    $
    (0.12
    )




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##### Table of Contents



Three Months EndedJune 30,2004
    
    2005Risk-free interest rate
    
    3.74  4.69
    %
    3.61  4.09
    %Expected dividend yield
    
    
    
    Expected life
    
    5 years
    
    5 yearsExpected volatility
    
    85
    %
    68
    %
 (f) Net Loss per Common Share
 Earnings per Share
 3. Stockholders Equity




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##### Table of Contents



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




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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
    
    
    (3,077,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    3,777,000Balance, June 30, 2005
    
    $
    1,142,000
    2005
    
    $
    1,213,0002006
    
    
    776,000Total payments
    
    
    1,989,000Less: Portion related to periodic interest payments
    
    
    (66,000
    )Non-cash interest related to debt discount
    
    
    (781,000
    )Balance, June 30, 2005
    
    
    1,142,000Less current portion
    
    
    1,142,000Long-term portion
    
    
    




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##### Table of Contents



5. Contingencies
 Intellectual Property Rights
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview




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##### Table of Contents



Results of Operations
 Quarter Ended June 30, 2004 (Q2 2004) Compared with Quarter Ended June 30, 2005 (Q2 2005)
 Revenues
 Q2 2004
    
    Q2 2005
    
    $ Change
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    904,000
    
    
    $
    1,862,000
    
    
    $
    958,000
    
    
    
    106
    %NMP22 Lab Test Kit Sales
    
    
    234,000
    
    
    
    187,000
    
    
    
    (47,000
    )
    
    
    (20
    %)Other Product Sales
    
    
    494,000
    
    
    
    570,000
    
    
    
    76,000
    
    
    
    15
    %Total Product Sales
    
    
    1,632,000
    
    
    
    2,619,000
    
    
    
    987,000
    
    
    
    60
    %Alliance and Collaboration Revenue
    
    
    50,000
    
    
    
    25,000
    
    
    
    (25,000
    )
    
    
    (50
    %)Total Revenue
    
    $
    1,682,000
    
    
    $
    2,644,000
    
    
    $
    962,000
    
    
    
    57
    %
       June 30, 2004
    
    June 30, 2005
    
    $ Change
    
    % ChangeCollaboration fees
    
    $
    780,000
    
    
    $
    735,000
    
    
    $
    (45,000
    )
    
    
    (6
    %)Deferred product revenue
    
    
    367,000
    
    
    
    253,000
    
    
    
    (114,000
    )
    
    
    (31
    %)$
    1,147,000
    
    
    $
    988,000
    
    
    $
    (159,000
    )
    
    
    (14
    %)
 Cost of Product Sales
 Q2 2004
    
    Q2 2005
    
    $Change
    
    % ChangeProduct Sales
    
    $
    1,632,000
    
    
    $
    2,619,000
    
    
    $
    987,000
    
    
    
    60
    %Cost of Product Sales
    
    
    646,000
    
    
    
    777,000
    
    
    
    131,000
    
    
    
    20
    %Gross Profit
    
    $
    986,000
    
    
    $
    1,842,000
    
    
    $
    856,000
    
    
    
    87
    %Gross Profit Margin
    
    
    60
    %
    
    
    70
    %




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##### Table of Contents



Research and Development and Clinical Expenses
 Q2 2004
    
    
    Q2 2005
    
    
    $ Change
    
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    690,000
    
    
    $
    703,000
    
    
    $
    13,000
    
    
    
    2
    %
  Selling, General and Administrative Expenses
 Q2 2004
    

    Q2 2005
    

    $ Change
    
    
    % ChangeGross Profit
    
    $
    986,000
    
    
    $
    1,842,000
    
    
    $
    856,000
    
    
    
    87
    %Selling, General and
Administrative Expenses
    
    
    2,783,000
    
    
    
    3,198,000
    
    
    
    415,000
    
    
    
    15
    %SG&A as % of Gross Profit
    
    
    282
    %
    
    
    174
    %
   Operating Loss
 Q2 2004
    
    
    Q2 2005
    
    
    $ Change
    
    
    % ChangeOperating Loss
    
    $
    2,437,000
    
    
    $
    2,035,000
    
    
    $
    (402,000
    )
    
    
    (16
    %)
  Interest Income
 Q2 2004
    
    
    Q2 2005
    
    
    $ Change
    
    
    % ChangeInterest Income
    
    $
    29,000
    
    
    $
    42,000
    
    
    $
    13,000
    
    
    
    45
    %
  Interest Expense
 Q2 2004
    
    Q2 2005
    
    $ Change
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    120,000
    
    
    $
    40,000
    
    
    $
    (80,000
    )
    
    
    (67
    %)Non-Cash Charges to Interest Expense
    
    
    691,000
    
    
    
    564,000
    
    
    
    (127,000
    )
    
    
    (19
    %)Total
    
    
    811,000
    
    
    
    604,000
    
    
    
    (207,000
    )
    
    
    (26
    %)Interest Related to Other Debt:Interest Paid in Cash
    
    
    2,000
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    (50
    %)Total Interest
    
    $
    813,000
    
    
    $
    605,000
    
    
    $
    (208,000
    )
    
    
    (26
    %)




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##### Table of Contents




    
    $32,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $47,000 at June 30, 2005;
    
    $33,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash;
    
    $499,000 of amortized debt discount, which contributed to reducing the $4,558,000
of debt discount on our $5,000,000 note to $781,000 at June 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.
  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
    
    
    983,000Payment in Stock
    
    
    (1,154,000
    )Carrying Value of Debt at 6/30/05
    
    $
    1,142,000




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##### Table of Contents



We have substantially increased
our indebtedness and may not be able to meet our payment obligation.
 Mark-to-market adjustment from warrants
 Q2 2004
    
    Q2 2005
    
    $ Change
    
    % ChangeMark-to-market Adjustment From Warrants
    
    
    
    
    
    $
    1,213,000
    
    
    $
    1,213,000
    
    
    
    100
    %
  Net Loss
 Q2 2004
    
    Q2 2005
    
    $ Change
    
    % ChangeNet Loss
    
    $
    3,221,000
    
    
    $
    1,384,000
    
    
    $
    (1,837,000
    )
    
    
    (57
    %)
  Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2005
 Revenues
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Product Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    1,638,000
    
    
    $
    3,339,000
    
    
    $
    1,701,00
    
    
    
    104
    %NMP22 Lab Test Kit Sales
    
    
    429,000
    
    
    
    376,000
    
    
    
    (53,000
    )
    
    
    (12
    %)Other Product Sales
    
    
    951,000
    
    
    
    1,048,000
    
    
    
    97,000
    
    
    
    10
    %Total Product Sales
    
    
    3,018,000
    
    
    
    4,763,000
    
    
    
    1,745,000
    
    
    
    58
    %Alliance and Collaboration Revenue
    
    
    98,000
    
    
    
    55,000
    
    
    
    (43,000
    )
    
    
    (44
    %)Total Revenue
    
    $
    3,116,000
    
    
    $
    4,818,000
    
    
    $
    1,702,000
    
    
    
    55
    %




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##### Table of Contents



June 30, 2004
    
    June 30, 2005
    
    $ Change
    
    % ChangeCollaboration fees
    
    $
    780,000
    
    
    $
    735,000
    
    
    $
    (45,000
    )
    
    
    (6
    %)Deferred product revenue
    
    
    367,000
    
    
    
    253,000
    
    
    
    (114,000
    )
    
    
    (31
    %)$
    1,147,000
    
    
    $
    988,000
    
    
    $
    (159,000
    )
    
    
    (14
    %)
 Cost of Product Sales
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Product Sales
    
    $
    3,018,000
    
    
    $
    4,762,000
    
    
    $
    1,744,000
    
    
    
    58
    %Cost of Product Sales
    
    
    1,185,000
    
    
    
    1,495,000
    
    
    
    310,000
    
    
    
    26
    %Gross Profit
    
    $
    1,833,000
    
    
    $
    3,267,000
    
    
    $
    1,434,000
    
    
    
    78
    %Gross Profit Margin
    
    
    61
    %
    
    
    69
    %
  Research and Development and Clinical Expenses
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Research and
Development,
Clinical and
Regulatory Expenses
    
    $
    1,406,000
    
    
    $
    1,433,000
    
    
    $
    27,000
    
    
    
    2
    %
  Selling, General and Administrative Expenses
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Gross Profit
    
    $
    1,833,000
    
    
    $
    3,268,000
    
    
    $
    1,435,000
    
    
    
    78
    %Selling, General and
Administrative Expenses
    
    
    5,052,000
    
    
    
    6,090,000
    
    
    
    1,038,000
    
    
    
    21
    %SG&A as % of Gross Profit
    
    
    276
    %
    
    
    186
    %
   Operating Loss
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Operating Loss
    
    $
    4,527,000
    
    
    $
    4,200,000
    
    
    $
    (327,000
    )
    
    
    (7
    %)




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##### Table of Contents



Interest Income
 Six Months Ended

    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Interest Income
    
    $
    49,000
    
    
    $
    69,000
    
    
    $
    20,000
    
    
    
    41
    %
  Interest Expense
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Interest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    219,000
    
    
    $
    90,000
    
    
    $
    (129,000
    )
    
    
    (59
    %)Non-Cash Charges to Interest Expense
    
    
    1,210,000
    
    
    
    1,185,000
    
    
    
    (25,000
    )
    
    
    (2
    %)Total
    
    $
    1,429,000
    
    
    $
    1,275,000
    
    
    $
    (154,000
    )
    
    
    (11
    %)Interest Related to Other Debt:Interest Paid in Cash
    
    $
    6,000
    
    
    $
    1,000
    
    
    $
    (5,000
    )
    
    
    (83
    %)Total Interest
    
    $
    1,435,000
    
    
    $
    1,276,000
    
    
    $
    (159,000
    )
    
    
    (11
    %)
   
    
    $71,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $47,000 at June 30, 2005;
    
    $130,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash;
    
    $983,000 of amortized debt discount, which contributed to reducing the $4,558,000
of debt discount on our $5,000,000 note to $781,000 at June 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.
 Mark-to-market adjustment from warrants
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Mark-to-market Adjustment From Warrants
    
    
    
    
    
    $
    1,927,000
    
    
    $
    1,927,000
    
    
    
    100
    %
  Net Loss
 Six Months Ended
    
    Six Months Ended
    
    $ Change
    
    % ChangeJune 30, 2004
    
    June 30, 2005Net Loss
    
    $
    5,914,000
    
    
    $
    3,479,000
    
    
    $
    (2,435,000
    )
    
    
    (41
    %)Net Loss Attributable to Common Shareholders
    
    $
    5,914,000
    
    
    $
    5,107,000
    
    
    $
    (807,000
    )
    
    
    (14
    %)




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##### Table of Contents



Liquidity and Capital Resources
  Summary Cash Flow
 Six Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2005Net Loss
    
    $
    (5,913,000
    )
    
    $
    (3,479,000
    )Non-cash Charges
    
    
    1,541,000
    
    
    
    (525,000
    )Changes in Assets and Liabilities
    
    
    391,000
    
    
    
    (464,000
    )Net Operating Uses
    
    
    (3,981,000
    )
    
    
    (4,468,000
    )Net Investment Uses
    
    
    (121,000
    )
    
    
    (118,000
    )Net Financing Sources
    
    
    5,567,000
    
    
    
    5,288,000Foreign exchange effect
    
    
    (16,000
    )
    
    
    (28,000
    )Change in cash and cash equivalents
    
    $
    1,449,000
    
    
    $
    674,000
   Financings
  Common stock outstanding
    
    
    44,708,000Stock reserved for converting debentures
    
    
    1,943,000Stock reserved for warrant exercises
    
    
    10,413,000




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##### Table of Contents



Stock reserved for outstanding stock options
    
    
    3,052,000Stock reserved for Series A Preferred Stock
    
    
    6,436,000Total
    
    
    66,552,000
   Financings




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##### Table of Contents



Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled in a Companys Own Stock,
     Off Balance Sheet Arrangements
  Critical Accounting Policies and Estimates




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##### Table of Contents



Research and Development
   Development Programs
  Program
    
    Technology
    
    Clinical
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationFormat
    
    Application
    
    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
GermanyNMP179 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 System




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##### Table of Contents



Program
    
    Technology
    
    Clinical
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationFormat
    
    Application
    
    Development
    
    Status
    
    Competitive Products (1)
    
    Arrangements (2)NMP66 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
  We have a history of operating losses, are continuing to lose money and may never be
profitable.




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##### Table of Contents



2002
    
    2003
    
    2004
    
    1st half 2005Product Sales
    
    $
    3,094,000
    
    
    $
    4,018,000
    
    
    $
    7,275,000
    
    
    $
    4,762,000Net Losses
    
    $
    8,278,000
    
    
    $
    7,878,000
    
    
    $
    11,123,000
    
    
    $
    3,479,000
  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 have substantial indebtedness and may not be able to meet our payment obligations.




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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.
 The operations of our European subsidiary involve currency exchange variability and other
risks .
   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.




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##### Table of Contents



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.
   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.




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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.




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##### Table of Contents



We have no demonstrated success in developing cellular analysis systems and any future success
in this area will be highly dependent upon Sysmex.
  Our inability to develop and commercialize additional products may adversely affect our
ability to achieve profitability.
  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.
  
    
    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.




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##### Table of Contents



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.
  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 we are unable to manufacture 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.




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##### Table of Contents



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 we are sued for product-related liabilities, the cost could be prohibitive to us.
  Our activities involve the use of hazardous materials, and we may be held liable for any
accidental injury from these hazardous materials.
  If our intellectual property is not adequately protected, we could lose our ability to compete
in the marketplace.




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##### Table of Contents



If our intellectual property infringes on the rights of others, we may be forced to modify or
cease production of our products.
  We may need to stop selling our BladderChek Tests if we cannot obtain a license or a waiver to
use lateral flow technology.
  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.
   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.




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##### Table of Contents



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.




---



##### 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 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.




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##### Table of Contents



Exhibit No:
    
    Description32.2
    
    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.




---



##### Table of Contents



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




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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.