##### 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 March 31, 2007
 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 
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:
 þ o
  o o þ
 o þ




---



##### Table of Contents



MATRITECH, INC.
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006
and March 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2007
    
    
    5Condensed Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 6. Exhibits
    
    
    32SIGNATURES
    
    
    33EX-10.4 Lease Agreement dated October 6, 1995EX-10.5 Franz Maier Employment Agreement dated July 1, 1998EX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 MATRITECH, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    
    March 31,2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,460,403
    
    
    $
    2,894,847Accounts receivable less allowance of $152,043 and $103,567 in 2006 and 2007, respectively
    
    
    1,266,481
    
    
    
    1,468,243Inventories
    
    
    968,737
    
    
    
    1,024,533Prepaid expenses and other current assets
    
    
    140,338
    
    
    
    240,525Total current assets
    
    
    3,835,959
    
    
    
    5,628,148Property and equipment, net of accumulated depreciation of $2,512,627 and $2,583,505 in 2006 and 2007, respectively
    
    
    768,038
    
    
    
    714,797Goodwill
    
    
    132,615
    
    
    
    132,615Debt issuance costs
    
    
    493,164
    
    
    
    699,109Other assets
    
    
    276,099
    
    
    
    224,880Total assets
    
    $
    5,505,875
    
    
    $
    7,399,549LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent Liabilities:Current maturities of notes payable
    
    $
    17,884
    
    
    $
    18,550Current maturities of secured convertible notes
    
    
    3,298,976
    
    
    
    5,100,269Accounts payable
    
    
    1,271,534
    
    
    
    776,029Accrued expenses
    
    
    2,373,006
    
    
    
    2,088,551Deferred revenue
    
    
    156,335
    
    
    
    153,971Registration rights liability
    
    
    324,953
    
    
    
    Total current liabilities
    
    
    7,442,688
    
    
    
    8,137,370Notes payable, less current maturities
    
    
    26,740
    
    
    
    21,854Secured convertible notes, less current maturities
    
    
    68,487
    
    
    
    Deferred revenue
    
    
    640,346
    
    
    
    636,448Other long term liabilities
    
    
    123,754
    
    
    
    50,385Total liabilities
    
    
    8,302,015
    
    
    
    8,846,057Commitments and ContingenciesPreferred StockAuthorized
 4,000,000 shares  Designated as Series A Convertible Preferred, $1.00 par value
 1,426,124 shares
Issued and outstanding  81,399 shares in 2006 and 2007
    
    
    104,312
    
    
    
    104,312Liquidation preference of $716,311 for Series A as of December 31, 2006 and March 31, 2007, respectively
    
    
    104,312
    
    
    
    104,312Stockholders Deficit:Common stock, $0.01 par valueAuthorized150,000,000 shares in 2006 and 2007Issued and outstanding56,759,061 shares in 2006 and 60,013,705 in 2007
    
    
    567,590
    
    
    
    600,137Additional paid-in capital
    
    
    106,313,122
    
    
    
    111,431,137Accumulated other comprehensive income
    
    
    140,633
    
    
    
    158,604Accumulated deficit
    
    
    (109,921,797
    )
    
    
    (113,740,698
    )Total stockholders deficit
    
    
    (2,900,452
    )
    
    
    (1,550,820
    )Total liabilities, convertible preferred stock and stockholders deficit
    
    $
    5,505,875
    
    
    $
    7,399,549
  3




---



##### Table of Contents



MATRITECH, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months EndedMarch 31,2006
    
    
    2007Revenue:Product sales, net of allowances
    
    $
    2,879,167
    
    
    $
    3,381,788Alliance and collaboration revenue
    
    
    29,444
    
    
    
    31,951Total revenue
    
    
    2,908,611
    
    
    
    3,413,739Expenses:Cost of product sales
    
    
    790,075
    
    
    
    759,433Research & development and clinical & regulatory expense
    
    
    831,461
    
    
    
    640,374Selling, general and administrative expense
    
    
    3,484,353
    
    
    
    4,036,099Total operating expenses
    
    
    5,105,889
    
    
    
    5,435,906Loss from operations
    
    
    (2,197,278
    )
    
    
    (2,022,167
    )Interest income
    
    
    41,553
    
    
    
    23,496Interest expense
    
    
    (913,275
    )
    
    
    (2,145,182
    )Mark-to-market adjustment from registration rights
    
    
    (23,659
    )
    
    
    Net loss
    
    $
    (3,092,659
    )
    
    $
    (4,143,853
    )Basic and diluted net loss per common share
    
    $
    (0.06
    )
    
    $
    (0.07
    )Basic and diluted weighted average number of common shares outstanding
    
    
    50,811,207
    
    
    
    58,494,674
  4




---



##### Table of Contents



MATRITECH, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three Months EndedMarch 31,2006
    
    
    2007Cash Flows from Operating Activities:Net loss
    
    $
    (3,092,659
    )
    
    $
    (4,143,853
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    62,969
    
    
    
    68,001Amortization of debt discount
    
    
    480,347
    
    
    
    1,295,712Amortization of deferred charges
    
    
    68,775
    
    
    
    188,821Stock option expense
    
    
    28,825
    
    
    
    34,727Restricted stock and restricted stock unit expense
    
    
    13,416
    
    
    
    6,651Issuance of
common stock for interest on convertible debentures and secured
convertible notes
    
    
    12,811
    
    
    
    925,237Noncash interest expense
    
    
    355,605
    
    
    
    620,400Mark-to-market adjustment on registration rights
    
    
    23,659
    
    
    
    Noncash expense related to bonus plan
    
    
    12,130
    
    
    
    5,322Provision for bad debts
    
    
    48,610
    
    
    
    22,506Changes in assets and liabilities:Accounts receivable
    
    
    93,605
    
    
    
    (218,314
    )Inventories
    
    
    (140,857
    )
    
    
    (51,153
    )Prepaid expenses and other assets
    
    
    (19
    )
    
    
    (48,969
    )Accounts payable
    
    
    384,390
    
    
    
    (496,062
    )Accrued expenses and other liabilities
    
    
    39,394
    
    
    
    (608,951
    )Deferred revenue
    
    
    (163,341
    )
    
    
    (6,262
    )Net cash used in operating activities
    
    
    (1,772,340
    )
    
    
    (2,406,187
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (69,493
    )
    
    
    (13,688
    )Net cash used in investing activities
    
    
    (69,493
    )
    
    
    (13,688
    )Cash Flows from Financing Activities:Payments on notes payable
    
    
    (7,380
    )
    
    
    (4,221
    )Proceeds from issuance of convertible debentures and warrants, net of issuance costs
    
    
    6,184,053
    
    
    
    3,845,500Net cash provided by financing activities
    
    
    6,176,673
    
    
    
    3,841,279Effect of foreign exchange on cash and cash equivalents
    
    
    22,725
    
    
    
    13,040Increase in cash and cash equivalents
    
    
    4,357,565
    
    
    
    1,434,444Cash and cash equivalents, beginning of period
    
    
    1,789,792
    
    
    
    1,460,403Cash and cash equivalents, end of period
    
    $
    6,147,357
    
    
    $
    2,894,847Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    19
    
    
    $
    4,857Supplemental Disclosure of Noncash Financing and Investing Activities:Beneficial conversion feature on secured convertible notes
    
    $
    2,974,292
    
    
    $
    1,671,466Issuance of common stock as payment of principal on convertible debentures:Number of shares issued
    
    
    1,215,304
    
    
    
    Payment on debt in dollars
    
    $
    769,231
    
    
    $
    Issuance of common stock as payment of interest on convertible debentures:Number of shares issued
    
    
    15,950
    
    
    
    Payment on debt in dollars
    
    $
    12,020
    
    
    $
    Issuance of common stock as payment of principal on the 2006 secured convertible notes:Number of shares issued
    
    
    
    
    
    
    1,550,197Payment on debt in dollars
    
    $
    
    
    
    $
    862,245Issuance of common stock as payment of interest on the 2006 secured convertible notes:Number of shares issued
    
    
    
    
    
    
    1,594,658Payment on debt in dollars
    
    $
    
    
    
    $
    925,237Conversion of 345,582 and 0 shares of convertible preferred stock to 4,344,466 and 0 shares of common stock in 2006 and 2007, respectively
    
    $
    442,863
    
    
    $
    Registration rights liability recorded as a debt discount
    
    $
    305,829
    
    
    $
    Allocation of $1,285,000 and $542,000 closing cost related to the 2006 and 2007 secured convertible notes:Registration rights liability
    
    $
    35,505
    
    
    $
    2006 and 2007 secured convertible notes (recorded in other assets)
    
    $
    912,403
    
    
    $
    394,765Purchase warrants (recorded in additional paid in capital)
    
    $
    337,712
    
    
    $
    147,356Payment of closing cost related to the 2006 and 2007 secured convertible notes with issuance of warrant to Placement Agent
    
    $
    471,700
    
    
    $
    22,620Warrants issued to stockholders and recorded as debt discount to the 2006 and 2007 secured convertible notes
    
    $
    1,807,876
    
    
    $
    1,186,466Conversion of 2006 secured convertible notes into common stock
    
    $
    45,000
    
    
    $
    Purchase of fixed assets through capital lease
    
    $
    18,730
    
    
    $
    
  5




---



##### Table of Contents



MATRITECH, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Basis of Presentation
    6




---



##### Table of Contents



®
 2. Summary of Significant Accounting Policies
 (a) Principles of Consolidation
  (b) Inventories
  December 31,
    
    
    March 31,2006
    
    
    2007Raw materials
    
    $
    195,724
    
    
    $
    183,539Work-in-process
    
    
    10,647
    
    
    
    17,844Finished goods
    
    
    752,605
    
    
    
    813,675Consignment inventory
    
    
    9,761
    
    
    
    9,475$
    968,737
    
    
    $
    1,024,533
 (c) Revenue Recognition
  March 31,December 31, 2006
    
    2007Collaboration fees
    
    $
    706,038
    
    
    $
    699,081Deferred product revenue
    
    
    90,643
    
    
    
    91,338$
    796,681
    
    
    $
    790,419
 7




---



##### Table of Contents



(d) Comprehensive Loss
  Three Months EndedMarch 31,2006
    
    
    2007Net loss
    
    $
    (3,092,659
    )
    
    $
    (4,143,853
    )Other comprehensive loss
Foreign currency translation adjustments
    
    
    32,946
    
    
    
    17,971Comprehensive loss
    
    $
    (3,059,713
    )
    
    $
    (4,125,882
    )
 (e) Stock-Based Compensation
 Share-Based Payment
 (f) Net Loss per Common Share
 Earnings per Share
 (g) Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No.
109
  8




---



##### Table of Contents



(SFAS
159) The Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115
 3. Stockholders Equity
    4. Convertible Debentures Issued March 2003
  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
    
    
    (5,000,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    4,558,000Balance, March 31, 2006
    
    $
    
 9




---



##### Table of Contents



5. Secured Convertible Notes
 2006 Secured Convertible Notes Issued January 2006
   Allocation of
    
    
    Allocation ofof
    
    
    AssociatedInstrument
    
    Proceeds
    
    
    Costs2006 Secured Convertible Notes
    
    $
    4,884,000
    
    
    $
    912,0002006 Purchaser Warrants
    
    
    1,808,000
    
    
    
    337,000Registration Rights Liability
    
    
    306,000
    
    
    
    36,000$
    6,998,000
    
    
    $
    1,285,000
  10




---



##### Table of Contents



Application of Issue No. 98-5 to Certain Convertible Instruments
 Face Value of 2006 Secured
    
    
    
    
    
    Value Allocated to 2006 SecuredConvertible Notes
    
    $
    6,998,000
    
    
    Convertible Notes
    
    $
    4,884,000Shares Upon Conversion
    
    
    10,766,092
    
    
    Shares Upon Conversion
    
    
    10,766,092Conversion Price
    
    $
    0.65
    
    
    Effective Conversion Price
    
    $
    0.454
  Closing Price January 13, 2006
    
    $
    0.73Effective Conversion Price
    
    $
    0.454Discount to Market per Share
    
    $
    0.276Shares Upon Conversion
    
    
    10,766,092Beneficial Conversion Feature
    
    $
    2,975,000
      11




---



##### Table of Contents



Proceeds at closing in January 2006
    
    $
    6,998,000Less:Fair value ascribed to the 2006 Purchaser Warrants
    
    
    (1,808,000
    )Fair value of Registration Rights Liability
    
    
    (306,000
    )Beneficial conversion feature calculated on date of closing and recorded as
debt discount
    
    
    (2,975,000
    )Carrying value at closing in January 2006
    
    
    1,909,000Add back:Cumulative principal payments made in stock
    
    
    (1,742,000
    )Cumulative amortization of debt discount and beneficial conversion features
    
    
    3,108,000Less:Additional beneficial conversion feature calculated and recorded as debt discount
    
    
    (208,000
    )Balance, March 31, 2007
    
    $
    3,067,000
 Minimum future payments on the debt are as follows:Total payments
    
    $
    5,861,000Less: Portion related to periodic interest payments
    
    
    (606,000
    )Non-cash interest related to debt discount
    
    
    (2,188,000
    )Balance, March 31, 2007
    
    $
    3,067,000Current portion
    
    $
    3,067,000
 Accounting for
Registration Payment Arrangements Accounting for Derivative Instruments and Hedging Activities Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others .
  2007 Secured Convertible Notes Issued January 2007
  12




---



##### Table of Contents



pari passu pari passu
     13




---



##### Table of Contents




    
    our failure to make payments as they become due;
    
    our failure to remain listed on any of the Nasdaq Markets, New York Stock Exchange (NYSE) or AMEX;
    
    our failure under certain circumstances to have an effective registration statement
available (after a valid demand for registration) for resale of the shares upon
conversion of the 2007 Secured Convertible Notes;
    
    failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
    
    our written notice or public announcement of the intention not to issue shares upon conversion;
    
    our making an assignment for the benefit of creditors, or applying for or consenting
to the appointment of a receiver or trustee for a substantial portion of our property
or business or that of any subsidiary;
    
    bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
    
    a sale or disposition of substantially all our assets;
    
    our default on our existing or future liabilities in excess of $250,000, including
the 2006 Secured Convertible Notes; and
    
    a breach of any material term of any other transaction document we entered into with
the purchasers of the 2007 Secured Convertible Notes.
  14




---



##### Table of Contents



Allocation of
    
    
    Allocation ofOf
    
    
    AssociatedInstrument
    
    Proceeds
    
    
    Costs2007 Secured Convertible Notes
    
    $
    3,178,000
    
    
    $
    395,0002007 Purchaser Warrants
    
    
    1,187,000
    
    
    
    147,000$
    4,365,000
    
    
    $
    542,000
    Face Value
of 2007 Secured
    
    
    
    
    
    Value Allocated to 2007 SecuredConvertible Notes
    
    $
    4,365,000
    
    
    Convertible Notes
    
    $
    3,178,000Shares Upon Conversion
    
    
    6,928,571
    
    
    Shares Upon Conversion
    
    
    6,928,571Conversion Price
    
    $
    0.63
    
    
    Effective Conversion Price
    
    $
    0.459
  15




---



##### Table of Contents



Closing Price January 22, 2007
    
    $
    0.70Effective Conversion Price
    
    $
    0.459Discount to Market per Share
    
    $
    0.241Shares Upon Conversion
    
    
    6,928,571Beneficial Conversion Feature
    
    $
    1,670,000
     Proceeds at closing in January 2007
    
    $
    4,365,000Less:Fair value ascribed to the 2007 Purchaser Warrants
    
    
    (1,187,000
    )Beneficial conversion feature calculated on date of closing and recorded
as debt discount
    
    
    (1,670,000
    )Carrying value at closing in January 2007
    
    
    1,508,000Add back:Cumulative principal payments made in stock
    
    
    Cumulative amortization of debt discount and beneficial conversion features
    
    
    526,000Balance, March 31, 2007
    
    $
    2,034,000
  Total payments
    
    $
    4,811,000Less: Portion related to periodic interest payments
    
    
    (446,000
    )Non-cash interest related to debt discount
    
    
    (2,331,000
    )Balance, March 31, 2007
    
    $
    2,034,000Current portion
    
    $
    2,034,000
 6. Stock-Based Compensation
   16




---



##### Table of Contents



2006
    
    
    2007Cost of product sales
    
    $
    1,519
    
    
    $
    2,115Research & development and clinical & regulatory
expense
    
    
    8,607
    
    
    
    6,665Selling, general and administrative expense
    
    
    44,245
    
    
    
    37,920Stock-based compensation expense included in net loss
    
    $
    54,371
    
    
    $
    46,700
  Weighted AverageExercise Price PerNumber of Options
    
    
    ShareOptions outstanding, December 31, 2006
    
    
    2,947,767
    
    
    $
    1.92Granted
    
    
    26,666
    
    
    
    0.70Exercised
    
    
    
    
    
    
    Terminated
    
    
    (72,327
    )
    
    
    0.86Options outstanding, March 31, 2007
    
    
    2,902,106
    
    
    $
    1.93
 Restricted Stock and Restricted Stock Units
  Number of Shares/UnitsUnvested at December 31, 2006
    
    
    474,352Granted
    
    
    142,251Vested
    
    
    (89,857
    )Forfeitures
    
    
    (13,532
    )Unvested at March 31, 2007
    
    
    513,214Weighted average fair value of
restricted stock and restricted stock
units granted in 2007
    
    $
    0.56
 7. Contingencies
 Intellectual Property Rights
  17




---



##### Table of Contents



8. Accrued Expenses
  December 31,
    
    
    March 31,2006
    
    
    2007Payroll and related costs
    
    $
    659,809
    
    
    $
    751,503Professional fees
    
    
    218,865
    
    
    
    297,675Interest on secured convertible Notes
    
    
    889,844
    
    
    
    291,590Royalties
    
    
    203,236
    
    
    
    133,750Deferred offering
    
    
    10,402
    
    
    
    229,317Other
    
    
    390,850
    
    
    
    384,716$
    2,373,006
    
    
    $
    2,088,551
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Overview
   18




---



##### Table of Contents



19




---



##### Table of Contents



Results of Operations
 Quarter Ended March 31, 2006 (Q1 2006) Compared with Quarter Ended March 31, 2007 (Q1
2007)
 Revenues
 Q1 2006
    
    
    Q1 2007
    
    

$ Change
    
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    2,387,000
    
    
    $
    2,792,000
    
    
    $
    405,000
    
    
    
    17
    %NMP22 Lab Test Kit Sales
    
    
    252,000
    
    
    
    343,000
    
    
    
    91,000
    
    
    
    36
    %Other Product Sales
    
    
    240,000
    
    
    
    247,000
    
    
    
    7,000
    
    
    
    3
    %Total Product Sales
    
    
    2,879,000
    
    
    
    3,382,000
    
    
    
    503,000
    
    
    
    17
    %Alliance and Collaboration Revenue
    
    
    29,000
    
    
    
    32,000
    
    
    
    3,000
    
    
    
    10
    %Total Revenue
    
    $
    2,908,000
    
    
    $
    3,414,000
    
    
    $
    506,000
    
    
    
    17
    %
      December 31, 2006
    
    
    March 31, 2007
    
    
    $ Change
    
    
    % ChangeAlliance and Collaboration revenue
    
    $
    706,000
    
    
    $
    699,000
    
    
    $
    (7,000
    )
    
    
    (1
    %)Deferred product revenue
    
    
    91,000
    
    
    
    91,000
    
    
    
    
    
    
    
    $
    797,000
    
    
    $
    790,000
    
    
    $
    (7,000
    )
    
    
    (0.9
    %)
  20




---



##### Table of Contents



Cost of Product Sales
 Q1 2006
    
    
    Q1 2007
    
    

$ Change
    
    
    % ChangeProduct Sales
    
    $
    2,879,000
    
    
    $
    3,382,000
    
    
    $
    503,000
    
    
    
    17
    %Cost of Product Sales
    
    
    790,000
    
    
    
    759,000
    
    
    
    (31,000
    )
    
    
    (4
    %)Gross Profit on Product Sales
    
    $
    2,089,000
    
    
    $
    2,623,000
    
    
    $
    534,000
    
    
    
    26
    %Gross Profit Margin on
Product Sales
    
    
    73
    %
    
    
    78
    %Cost of Product Sales as a %
of Product Sales
    
    
    27
    %
    
    
    22
    %
  Research & Development and Clinical & Regulatory Expenses
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeResearch &
development and
clinical &
regulatory expenses
    
    $
    831,000
    
    
    $
    640,000
    
    
    $
    (191,000
    )
    
    
    (23
    %)
  Selling, General and Administrative Expenses  (SG&A)
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeGross Profit on Product Sales
    
    $
    2,089,000
    
    
    $
    2,623,000
    
    
    $
    534,000
    
    
    
    26
    %SG&A
    
    
    3,484,000
    
    
    
    4,036,000
    
    
    
    552,000
    
    
    
    16
    %SG&A as % of Gross Profit on
Product Sales
    
    
    167
    %
    
    
    154
    %
   21




---



##### Table of Contents



Operating Loss
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    2,197,000
    
    
    $
    2,022,000
    
    
    $
    (175,000
    )
    
    
    (8
    %)
  Interest Income
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeInterest Income
    
    $
    42,000
    
    
    $
    23,000
    
    
    $
    (19,000
    )
    
    
    (45
    %)
  Interest Expense
 Q1 2006
    
    
    Q1 2007
    
    
    $ Change
    
    
    % ChangeInterest Related to Convertible Debentures and
Secured Convertible Notes:Interest on Debt
    
    $
    233,000
    
    
    $
    326,000
    
    
    $
    93,000
    
    
    
    40
    %Non-Cash Charges to Interest Expense
    
    
    680,000
    
    
    
    1,814,000
    
    
    
    1,134,000
    
    
    
    167
    %Total
    
    $
    913,000
    
    
    $
    2,140,000
    
    
    $
    1,227,000
    
    
    
    134
    %Interest Related to Other Debt:Interest Paid in Cash
    
    $
    
    
    
    $
    5,000
    
    
    $
    5,000
    
    
    
    100
    %Total Interest Expense
    
    $
    913,000
    
    
    $
    2,145,000
    
    
    $
    1,232,000
    
    
    
    135
    %
   2007 Secured Convertible Notes
   
    
    $73,000 of amortized deferred financing costs, which reduced the original
$395,000 balance of deferred financing costs to $322,000 at March 31, 2007 and
    
    $526,000 of amortized debt discount, which reduced the $2,857,000 of debt
discount to $2,331,000 at March 31, 2007.
 22




---



##### Table of Contents



Value of NotesPrincipal Value 2007 Secured Convertible Notes
    
    $
    4,365,000Discounts Recorded in 2007
    
    
    (2,857,000
    )2007 Amortization of Discounts
    
    
    526,000Interest and Principal Payments in Stock
    
    
    Carrying Value of 2007 Secured Convertible Notes at 3/31/07
    
    $
    2,034,000
 2006 Secured Convertible Notes
   
    
    $116,000 of amortized deferred financing costs, which contributed to the
reduction of the original $912,000 of deferred financing costs to $377,000 at March
31, 2007;
    
    $770,000 of amortized debt discount, which contributed to the reduction of the
$5,296,000 of debt discount to $2,188,000 at March 31, 2007; and
    
    $329,000 of non-cash charges to record the discount from fair value when making
the principal and interest repayments on the 2006 Secured Convertible Notes in stock
rather than cash.
  Value of NotesPrincipal Value of Debt
    
    $
    6,998,000Discounts Recorded in 2006
    
    
    (5,089,000
    )2006 Amortization of Discounts
    
    
    2,338,000Interest and Principal Payments in Stock
    
    
    (880,000
    )Carrying Value of Debt at 12/31/06
    
    $
    3,367,000Discounts Recorded in 2007
    
    
    (208,000
    )2007 Amortization of Discounts
    
    
    770,000Payment in Stock
    
    
    (862,000
    )Carrying Value of Debt at 3/31/07
    
    $
    3,067,000
 March 2003 Convertible Debentures
   23




---



##### Table of Contents




    
    $7,000 of amortized deferred financing costs, which contributed to the reduction
of the $475,000 deferred financing costs to $0 at March 31, 2006;
    
    $132,000 of non-cash charges to record the discount from fair value when making
the principal and interest repayments on the Convertible Debentures in stock rather
than cash; and
    
    $134,000 of amortized debt discount, which contributed to the reduction of the
$4,558,000 of debt discount on our $5,000,000 Note to $0 at March 31, 2006. This
debt discount comprises the following: the fair value allocated to the warrants
issued in conjunction with the Convertible Debenture: the charge to account for the
beneficial conversion feature recorded at the date the Convertible Debenture 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 protection
provisions.
  Value of DebenturesPrincipal Value of Debenture
    
    $
    5,000,000Discounts Recorded in 2003
    
    
    (2,777,000
    )2003 Amortization of Discounts
    
    
    644,000Carrying Value of Debenture 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 Debenture at 12/31/2004
    
    $
    1,755,000Discounts Recorded in 2005
    
    
    (442,000
    )2005 Amortization of Discounts
    
    
    1,630,000Payment in Stock
    
    
    (2,308,000
    )Carrying Value of Debenture at 12/31/05
    
    $
    635,0002006 Amortization of Discounts
    
    
    134,000Payment in Stock
    
    
    (769,000
    )Carrying Value of Debenture at 3/31/06
    
    $
    
 Mark-to-Market Adjustment From Registration Rights
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeMark-to-market
adjustment from
registration rights
    
    $
    24,000
    
    
    $
    
    
    
    $
    (24,000
    )
    
    
    (100
    %)
  Net Loss
 Q1 2006
    
    Q1 2007
    
    $ Change
    
    % ChangeNet Loss
    
    $
    3,093,000
    
    
    $
    4,144,000
    
    
    $
    1,051,000
    
    
    
    34
    %
 24




---



##### Table of Contents



Research and Development Programs
  Liquidity and Capital Resources
  Summary Cash Flow
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2006
    
    
    March 31, 2007Net Loss
    
    $
    (3,093,000
    )
    
    $
    (4,144,000
    )Non-cash Charges
    
    
    1,107,000
    
    
    
    3,167,000Changes in Assets and Liabilities
    
    
    213,000
    
    
    
    (1,429,000
    )Net Operating Uses
    
    
    (1,773,000
    )
    
    
    (2,406,000
    )Net Investment Uses
    
    
    (69,000
    )
    
    
    (14,000
    )Net Financing Sources
    
    
    6,177,000
    
    
    
    3,841,000Foreign exchange effect
    
    
    23,000
    
    
    
    13,000Change in cash and cash equivalents
    
    $
    4,358,000
    
    
    $
    1,434,000
     25




---



##### Table of Contents



Conversions andOriginal Issuance
    
    
    Repayments
    
    
    Outstanding2006 Secured
Convertible Notes
    
    $
    6,998,000
    
    
    $
    1,742,000
    
    
    $
    5,256,0002007 Secured
Convertible Notes
    
    $
    4,365,000
    
    
    
    
    
    
    
    4,365,000Other indebtedness
    
    
    
    
    
    
    
    
    
    
    40,000$
    9,661,000
    26




---



##### Table of Contents



ConversionOr Exercise PriceSecurity
    
    Common Shares
    
    
    Low
    
    
    HighCommon stock outstanding
    
    
    60,014,000
    
    
    
    
    
    
    
    Stock reserved for 2006 Secured Convertible
Notes
    
    
    13,105,000
    
    
    $
    .40
    
    
    $
    .63Stock reserved for 2007 Secured Convertible
Notes
    
    
    7,497,000
    
    
    
    .63
    
    
    
    .63Stock reserved for warrant exercises
    
    
    21,639,000
    
    
    
    .63
    
    
    
    2.70Stock reserved for potential warrant shares
    
    
    631,000
    
    
    
    .01
    
    
    
    .01Stock reserved for outstanding stock options
and restricted stock units
    
    
    2,981,000
    
    
    
    .55
    
    
    
    8.06Stock available for issuance under stock plans
    
    
    4,815,000
    
    
    
    
    
    
    
    Stock reserved for Series A Preferred Stock
    
    
    1,023,000
    
    
    
    .70
    
    
    
    .70Total
    
    
    111,705,000
  Financings
  27




---



##### Table of Contents



Contractual Obligations
  Payment Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOperating Lease Arrangements
    
    $
    2,247,000
    
    
    $
    651,000
    
    
    $
    1,195,000
    
    
    $
    401,000
    
    
    $
    Capital Lease Arrangements
    
    
    50,000
    
    
    
    24,000
    
    
    
    26,000
    
    
    
    
    
    
    
    Debenture Obligations
    
    
    10,673,000
    
    
    
    10,673,000
    
    
    
    
    
    
    
    
    
    
    
    Purchase Commitments
    
    
    1,427,000
    
    
    
    391,000
    
    
    
    1,036,000Service Agreement Commitments
    
    
    27,000
    
    
    
    22,000
    
    
    
    5,000Total
    
    $
    14,424,000
    
    
    $
    11,761,000
    
    
    $
    2,262,000
    
    
    $
    401,000
    
    
    $
    
       Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  28




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
  
 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
 29




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1A. Risk Factors.
   We expect that we will need to obtain additional capital in the near future in order to
continue our operations.
  We may be unable to comply with payment provisions of our Secured Convertible Notes.
  30




---



##### Table of Contents



We could suffer significant consequences in the event of non-compliance with provisions of our
Secured Convertible Notes.
  
    
    our failure to make payments as they become due;
    
    our failure to remain listed on any of the Nasdaq Markets, NYSE or AMEX;
    
    our failure to have an effective registration statement
available for resale of the shares (except in the case of the 2007 Secured Convertible Notes only if registration has
been demanded);
    
    failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
    
    our written notice or public announcement of the intention not to issue shares upon conversion;
    
    our making an assignment for the benefit of creditors, or applying for or consenting to
the appointment of a receiver or trustee for a substantial portion of our property or
business or that of any subsidiary;
    
    bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
    
    a sale or disposition of substantially all our assets;
    
    our default on our existing or future liabilities in excess of $250,000; and
    
    a breach of any material term of any other transaction document we entered into with the
purchasers of the Secured Convertible Notes.
  31




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 6. Exhibits.
 Exhibit No:
    
    Description4.1
    
    Election regarding Payments due April 13, 2007 on 15% Secured
Convertible Promissory Notes (filed as Exhibit 4.1 to our Current Report
on Form 8-K filed April 16, 2007 and incorporated herein by reference).10.1#
    
    Form of Incentive Stock Option Agreement under 2006 Equity and Incentive
Plan (filed as Exhibit 10.1 to our Current Report on Form 8-K filed
March 30, 2007 and incorporated herein by reference).10.2#
    
    Form of Non-Qualified Stock Option Agreement under 2006 Equity and
Incentive Plan (filed as Exhibit 10.2 to our Current Report on Form 8-K
filed March 30, 2007 and incorporated herein by reference)10.3#
    
    Form of Performance-Based Incentive Stock Option Agreement under 2006
Equity and Incentive Plan (filed as Exhibit 10.3 to our Current Report
on Form 8-K filed March 30, 2007 and incorporated herein by reference)10.4**
    
    Lease Agreement between Matritech, Inc. and One Nevada Realty Trust
dated October 6, 1995 (originally filed as Exhibit 10.11 to our Annual
Report on Form 10-K405 for the fiscal year ended December 31, 1999 and
refiled in electronic form herewith)10.5# **
    
    Employment Agreement dated July 1, 1998 between ADL GmbH and Franz Maier.31.1**
    
    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.
 
 **
    
    Filed herewith#
    
    Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-Q pursuant to Item 6
of this report. 32




---



##### Table of Contents



SIGNATURES
  MATRITECH, INC.Date: May 15, 2007
    By:
    /s/ Stephen D. ChubbStephen D. ChubbDirector, Chairman and Chief Executive Officer

(principal executive officer)Date: May 15, 2007
    By:
    /s/ Richard A. SandbergRichard A. SandbergDirector, Vice President, Chief Financial
Officer and Treasurer

(principal accounting and financial officer) 33




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No:
    
    Description4.1
    
    Election regarding Payments due April 13, 2007 on 15% Secured
Convertible Promissory Notes (filed as Exhibit 4.1 to our Current Report
on Form 8-K filed April 16, 2007 and incorporated herein by reference).10.1#
    
    Form of Incentive Stock Option Agreement under 2006 Equity and Incentive
Plan (filed as Exhibit 10.1 to our Current Report on Form 8-K filed
March 30, 2007 and incorporated herein by reference).10.2#
    
    Form of Non-Qualified Stock Option Agreement under 2006 Equity and
Incentive Plan (filed as Exhibit 10.2 to our Current Report on Form 8-K
filed March 30, 2007 and incorporated herein by reference)10.3#
    
    Form of Performance-Based Incentive Stock Option Agreement under 2006
Equity and Incentive Plan (filed as Exhibit 10.3 to our Current Report
on Form 8-K filed March 30, 2007 and incorporated herein by reference)10.4**
    
    Lease Agreement between Matritech, Inc. and One Nevada Realty Trust
dated October 6, 1995 (originally filed as Exhibit 10.11 to our Annual
Report on Form 10-K405 for the fiscal year ended December 31, 1999 and
refiled in electronic form herewith)10.5# **
    
    Employment Agreement dated July 1, 1998 between ADL GmbH and Franz Maier.31.1
    
    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.
 
 **
    
    Filed herewith#
    
    Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-Q pursuant to Item 6
of this report. 34