UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
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For the quarterly period ended September 30, 2007
OR
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
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For
the transition period from
to
Commission file number: 001-12128
Matritech, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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04-2985132
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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330 Nevada Street, Newton, Massachusetts 02460
(Address of Principal Executive Offices) (Zip Code)
(617) 928-0820
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large Accelerated
o
Accelerated
o
Non-accelerated
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
þ
No
As of November 6, 2007, there were 62,200,272 shares of the Registrants Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MATRITECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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December 31,
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September 30,
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2006
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2007
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,460,403
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$2,795,969
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Accounts receivable less allowance of $152,043 and $79,505
in 2006 and 2007, respectively
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1,266,481
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1,504,559
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Inventories
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968,737
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1,069,276
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Prepaid expenses and other current assets
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140,338
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141,311
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Total current assets
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3,835,959
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5,511,115
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Property and equipment, net of accumulated depreciation of
$2,512,627 and $2,737,387 in 2006 and 2007, respectively
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768,038
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632,790
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Goodwill
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132,615
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132,615
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Debt issuance costs
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493,164
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203,457
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Other assets
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276,099
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234,793
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Total assets
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$
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5,505,875
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$
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6,714,770
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LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT
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Current Liabilities:
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Current maturities of notes payable
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$
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17,884
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$
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19,963
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Current maturities of secured convertible notes
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3,298,976
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11,706,435
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Accounts payable
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1,271,534
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1,612,564
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Accrued expenses
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2,373,006
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2,834,695
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Deferred revenue
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156,335
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128,442
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Registration rights liability
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324,953
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Total current liabilities
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7,442,688
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16,302,099
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Notes payable, less current maturities
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26,740
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11,506
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Secured convertible notes, less current maturities
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68,487
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Deferred revenue
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640,346
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59,659
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Other long term liabilities
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123,754
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144,306
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Total liabilities
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8,302,015
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16,517,570
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Commitments and Contingencies
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Preferred Stock
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Authorized 4,000,000 shares
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Designated as Series A Convertible Preferred, $1.00 par value 1,426,124 shares
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Issued and outstanding 81,399 shares in 2006 and 2007
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Liquidation preference of $716,311 for Series A as of December 31, 2006 and September
30, 2007, respectively
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104,312
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104,312
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104,312
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104,312
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Stockholders Deficit:
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Common stock, $0.01 par value
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Authorized150,000,000 shares in 2006 and 2007
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Issued and outstanding56,759,061 shares in 2006 and 62,220,237 in 2007
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567,590
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622,202
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Additional paid-in capital
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106,313,122
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112,413,059
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Accumulated other comprehensive income
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140,633
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207,634
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Accumulated deficit
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(109,921,797
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(123,150,007
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Total stockholders deficit
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(2,900,452
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(9,907,112
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Total liabilities, convertible preferred stock and stockholders deficit
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$
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5,505,875
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$
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6,714,770
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The accompanying Notes are an integral part of these interim condensed consolidated financial statements.
3
MATRITECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2006
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2007
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2006
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2007
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Revenue:
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Product sales, net of allowances
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$
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2,805,390
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$
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3,363,393
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$8,483,598
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$
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10,010,558
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Alliance and collaboration revenue
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24,555
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621,035
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78,070
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687,240
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Total revenue
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2,829,945
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3,984,428
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8,561,668
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10,697,798
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Expenses:
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Cost of product sales
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741,172
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829,353
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2,280,204
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2,374,066
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Research & development and clinical & regulatory expense
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699,536
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506,867
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2,256,884
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1,740,169
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Selling, general and administrative expense
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3,529,489
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4,647,277
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10,667,968
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12,838,080
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Total operating expenses
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4,970,197
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5,983,497
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15,205,056
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16,952,315
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Loss from operations
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(2,140,252
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(1,999,069
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(6,643,388
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(6,254,517
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Interest income
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27,928
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9,079
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119,614
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48,893
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Interest expense
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(816,451
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(2,838,693
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(3,026,817
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(7,347,538
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Mark-to-market adjustment from registration rights
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(10,682
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(48,589
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Net loss
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$
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(2,939,457
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$
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(4,828,683
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$
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(9,599,180
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$
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(13,553,162
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Basic and diluted net loss per common share
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$
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(0.05
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$
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(0.08
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(0.18
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$
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(0.22
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)
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Basic and diluted weighted average number of common shares outstanding
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56,142,146
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61,782,909
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54,044,348
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60,333,461
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The accompanying Notes are an integral part of these interim condensed consolidated financial statements.
4
MATRITECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended
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September 30,
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2006
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2007
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Cash Flows from Operating Activities:
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Net loss
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$
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(9,599,180
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$
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(13,553,162
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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206,615
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204,923
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Amortization of debt discount
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1,861,842
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4,509,071
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Accretion of premium on debt
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694,797
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Amortization of deferred charges
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316,475
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684,473
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Stock option expense
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107,552
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124,505
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Restricted stock and restricted stock unit expense
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41,750
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19,953
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Issuance of common stock for interest on convertible debentures and secured convertible
notes
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12,811
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1,197,938
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Non-cash interest expense
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829,593
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1,291,776
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Mark-to-market adjustment on registration rights
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48,589
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Non-cash expense related to bonus plan
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27,245
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39,812
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Provision for bad debts
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51,772
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(1,556
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)
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Changes in assets and liabilities:
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Accounts receivable
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272,600
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(197,612
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)
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Inventories
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(367,287
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)
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(70,217
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)
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Prepaid expenses and other assets
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62,792
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40,331
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Accounts payable
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(103,068
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)
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341,314
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Accrued expenses and other liabilities
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245,893
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(387,934
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)
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Deferred revenue
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(150,234
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)
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(608,580
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)
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Net cash used in operating activities
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(6,134,240
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)
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(5,670,168
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)
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Cash Flows from Investing Activities:
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Purchases of property and equipment
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(88,648
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)
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(62,378
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)
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Net cash used in investing activities
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(88,648
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)
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(62,378
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)
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Cash Flows from Financing Activities:
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Payments on notes payable
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(20,690
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)
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(13,155
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)
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Payments on secured convertible notes
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|
|
|
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(205,247
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)
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Payments on warrant buy-back
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(31,373
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)
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Proceeds from sale of secured promissory note, net of issuance costs
|
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3,444,100
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Proceeds from issuance of secured convertible notes and warrants, net of issuance costs
|
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|
6,184,053
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|
|
|
3,845,500
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Proceeds from exercise of warrants
|
|
|
39,896
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|
|
|
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|
|
|
|
|
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Net cash provided by financing activities
|
|
|
6,203,259
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|
|
|
7,039,825
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|
|
|
|
|
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|
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Effect of foreign exchange on cash and cash equivalents
|
|
|
15,622
|
|
|
|
28,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Increase in cash and cash equivalents
|
|
|
(4,007
|
)
|
|
|
1,335,566
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,789,792
|
|
|
|
1,460,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents, end of period
|
|
$
|
1,785,785
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|
|
$
|
2,795,969
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|
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|
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|
|
|
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|
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|
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Supplemental Cash Flow Information:
|
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|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
10,388
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|
|
$
|
40,472
|
|
|
|
|
|
|
|
|
|
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Supplemental Disclosure of Non-cash Financing and Investing Activities:
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|
|
|
|
|
|
|
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Beneficial conversion feature on secured convertible notes
|
|
$
|
2,974,292
|
|
|
$
|
1,671,466
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|
Issuance of common stock as payment of principal on convertible debentures:
|
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|
|
|
|
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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:
|
|
|
|
|
|
|
|
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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:
|
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|
|
|
|
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Number of shares issued
|
|
|
|
|
|
|
3,081,185
|
|
Payment on debt in dollars
|
|
$
|
|
|
|
$
|
1,458,988
|
|
Issuance of common stock as payment of interest on the 2006 secured convertible notes:
|
|
|
|
|
|
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Number of shares issued
|
|
|
|
|
|
|
2,286,070
|
|
Payment on debt in dollars
|
|
$
|
|
|
|
$
|
1,197,939
|
|
Conversion of 487,852 and 0 shares of convertible preferred stock to 6,133,000 and 0 shares of common stock in 2006 and 2007, respectively
|
|
$
|
625,183
|
|
|
$
|
|
|
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
|
|
|
$
|
394,765
|
|
Purchase warrants (recorded in additional paid in capital)
|
|
$
|
337,712
|
|
|
$
|
147,356
|
|
Payment of closing cost related to the 2006 and 2007 secured convertible notes with issuance of warrant to Placement Agent
|
|
$
|
471,700
|
|
|
$
|
22,620
|
|
Warrants issued to stockholders and recorded as debt discount to the 2006 and 2007 secured convertible notes
|
|
$
|
1,807,876
|
|
|
$
|
1,186,466
|
|
Conversion of 2006 secured convertible notes into common stock
|
|
$
|
785,000
|
|
|
$
|
|
|
Purchase of fixed assets through capital lease
|
|
$
|
40,783
|
|
|
$
|
|
|
The accompanying Notes are an integral part of these interim condensed consolidated financial statements.
5
MATRITECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Basis of Presentation
The quarterly unaudited condensed consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and United States generally accepted accounting principles (US GAAP) and
include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments
necessary for a fair statement of interim period results. Certain information and footnote
disclosures normally included in condensed consolidated financial statements prepared in accordance
with US GAAP have been condensed or omitted pursuant to such rules and regulations. The results
for the interim periods presented are not necessarily indicative of results to be expected for any
future period. These condensed consolidated financial statements are based upon accounting
policies and methods of their application consistent with those used and described in, and should
be read in conjunction with, the audited consolidated financial statements and Notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed
with the SEC on March 27, 2007 (File No. 001-12128).
We have suffered recurring losses from operations and negative cash flows from operations that
raise substantial doubt about our ability to continue as a going concern. We have incurred losses
from operations since our inception. We had an accumulated deficit of $123 million at September
30, 2007 and had only $2.8 million of cash and cash equivalents at September 30, 2007.
On August 27, 2007, we entered into an asset purchase agreement (the Asset Purchase
Agreement) with Inverness Medical Innovations, Inc. (Inverness) and Milano Acquisition Corp., a
wholly owned subsidiary of Inverness (Milano), pursuant to which Milano has agreed to acquire
substantially all of our assets (the Asset Sale). If our stockholders approve the Asset Sale and
the other conditions to closing are satisfied, we expect the Asset Sale to close in the fourth
quarter of 2007. Following the closing of the Asset Sale and subject to the approval of our
stockholders, we intend to dissolve in compliance with the applicable provisions of the Delaware
General Corporation Law.
In order to finance our operations until the closing of the Asset Sale, on August 30, 2007 we
sold Series C Secured Promissory Notes (the Series C Notes) for aggregate consideration of $3.5
million (before expenses). See Note 6 Notes Payable. All of the principal, interest and
premium on the Series C Notes are due and payable on December 13, 2007, the same date on which all
unpaid principal, interest and premium on our 15% Secured Convertible Promissory Notes dated
January 13, 2006 (the 2006 Secured Convertible Notes) and Series B 15% Secured Convertible
Promissory Notes dated January 22, 2007 (the 2007 Secured Convertible Notes) are due.
(Collectively, the 2006 Secured Convertible Notes and the 2007 Secured Convertible Notes are
referred to as the Secured Convertible Notes and collectively the Secured Convertible Notes and
the Series C Notes are referred to as the Secured Promissory Notes).
6
If the closing of the Asset Sale does not occur prior to December 13, 2007, the maturity date
of the Secured Promissory Notes, we would have to seek extension agreements from the holders of our
outstanding Secured Promissory Notes. We may incur higher
interest costs or other costs in connection with any extension we may negotiate with these
note holders. If the Asset Sale does not close prior to December 13, 2007, and if the holders of
all of our outstanding Secured Promissory Notes do not agree to grant us an extension of this
maturity date, we may be required to obtain additional financing to repay these outstanding Secured
Promissory Notes. There can be no guaranty, however, that we will be successful in obtaining this
additional financing on acceptable terms or at all. As a result, it is possible that if the Asset
Sale has not closed prior to December 13, 2007, we may not have funds available to satisfy our
obligations under our outstanding Secured Promissory Notes and may, as a result, default on these
Secured Promissory Notes. Further, since these notes are secured by our assets, if we defaulted on
our obligations under these Secured Promissory Notes, it is possible that the collateral agent, on
behalf of the holders of our Secured Promissory Notes, could take action to enforce its security
interest in our assets. Were this to occur, we would not likely be able to consummate the Asset
Sale to Inverness or any other business combination transaction.
Depending on the timing of the closing of the Asset Sale, even if we secure an extension of
the maturity date of our Secured Promissory Notes, we may need to obtain additional capital in
order to be able to continue operations until the closing of the Asset Sale. We will, as we deem
necessary or prudent and subject to the terms and conditions of the Asset Purchase Agreement and
our various outstanding debt and equity agreements, continue to seek to raise additional capital
through various financing alternatives, including equity or debt financings, issuances of
securities convertible into equity and corporate partnering arrangements. However, we have had
great difficulty obtaining additional financing over the past year and may be unable to raise
further capital. If we raise additional funds, we may provide rights and preferences to new
investors which are not available to current shareholders or debt holders. In addition, our
existing financing arrangements contain anti-dilution protection provisions which may require us to
issue additional securities if certain conditions are met. Any future financings will reduce
amounts that may be available for distribution to our common stockholders upon our dissolution
(assuming we receive stockholder approval of and that we consummate the Asset Sale and that we
receive stockholder approval of the dissolution). Future financings may also have an adverse
impact on the price of our common stock and may dilute the ownership interest of our existing
investors. If we do not timely receive additional financing or do not receive an adequate amount
of additional financing, we will be required to cease operations and/or file for bankruptcy
protection. These financial statements do not include any adjustments that would be necessary if
we were unable to continue as a going concern entity.
In September 2006, we received notice from the American Stock Exchange (AMEX), the principal
trading market of our common stock, that we were not in compliance with certain continued listing
standards relative to maintenance of stockholders equity and profitability. On October 23, 2006,
we submitted to AMEX a plan of proposed actions we believed would bring us into compliance with
applicable listing standards no later than March 21, 2008. On December 8, 2006, we received notice
that AMEX had accepted our plan. AMEX may initiate delisting procedures against us if we do not
make progress consistent with the plan during the plan period or we are not in compliance with
applicable listing standards at the end of the plan period. Delisting of shares of our common
stock would violate terms of our various financing documents, could result in the declaration of an
event of default in our Secured Convertible Notes and could cause holders of those notes to seek to
recover potential damages from us. In addition, any suspension of trading or delisting of our
shares could jeopardize the consummation of the Asset Sale and could make it more difficult for us
to raise any additional capital we may need to continue operations until the closing of the Asset
Sale. Further, suspension of trading or delisting of our shares could seriously impair the ability
of our stockholders to sell shares of our stock.
The terms of the Asset Purchase Agreement prevent us from incurring more debt without the
prior written consent of Inverness. In addition, the terms of our existing securities greatly
restrict our future financing options. For example, the terms of our Series A Convertible
Preferred Stock (Series A Preferred Stock) impose a limitation on indebtedness not outstanding on
March 4, 2005 in excess of $15,300,000 except in limited forms. While our Secured Promissory Notes
are outstanding, we have restrictions on incurring additional indebtedness (other than receivables
financing not to exceed 80% of receivables and equipment purchase or lease financing not to exceed
$200,000), as well as restrictions on payment of cash dividends and redemption of securities.
Moreover, we have granted to a collateral agent on behalf of the holders of the Secured Promissory
Notes a security interest in collateral including some cell lines, equipment, inventory and general
intangibles related to our NMP22
®
product line, as well as proceeds from any sale of the product
line. We also granted contingent license rights to the collateral agent on behalf of the holders
of the Secured Promissory Notes in the field of bladder cancer detection to some of our patents
related to the NMP22 products, sublicense rights to patents licensed to us and used in connection
with the NMP22 product line, and license rights to trademarks used exclusively in connection with
the NMP22 product line. The NMP22 product line, portions of which serve as collateral for the
Secured Promissory Notes, includes all of our currently commercialized products. The agreements
reflecting the collateral and license arrangements contain restrictions on our sale or abandonment
of the collateral and the patent rights. Further, these agreements afford the collateral agent the
right to assume control of and sell the collateral and to use the contingent license rights
exclusively within the field of bladder cancer detection in the event of our default in our
obligations under the Secured Promissory Notes. If we default on these obligations, and the
collateral is sold, we will lose our primary source of operating income, which would have a
material adverse effect on our business and would severely jeopardize our ability to continue
operations.
7
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Matritech, Inc., a Delaware
corporation, and our wholly-owned subsidiary, Matritech GmbH, based in Freiburg, Germany. All
intercompany balances and transactions have been eliminated at consolidation level.
(b) Inventories
Inventories are stated at the lower of cost (determined on a first-in first-out basis) or
market and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
Raw materials
|
|
$
|
195,724
|
|
|
$
|
156,920
|
|
Work-in-process
|
|
|
10,647
|
|
|
|
20,226
|
|
Finished goods
|
|
|
752,605
|
|
|
|
881,566
|
|
Consignment inventory
|
|
|
9,761
|
|
|
|
10,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
968,737
|
|
|
$
|
1,069,276
|
|
|
|
|
|
|
|
|
(c) Revenue Recognition
Deferred revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
Collaboration fees
|
|
$
|
706,038
|
|
|
$
|
85,459
|
|
Deferred product revenue
|
|
|
90,643
|
|
|
|
102,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
796,681
|
|
|
$
|
188,101
|
|
|
|
|
|
|
|
|
On September 26, 2007, we entered into a Termination Agreement with Sysmex Corporation,
providing for the immediate termination of the Exclusive License and Exclusive Supply Agreement
dated November 20, 2002 between Sysmex and us. As a result of the termination of this agreement,
we recognized all remaining deferred revenue relating to the license and supply agreement. This
resulted in our recognizing approximately $609,000 of revenue which consisted of the remaining
amount of the license, which previously was being recognized over the fourteen-year term of the
related patents, as well as remaining unamortized amounts related to payments for research and
development services.
(d) Comprehensive Loss
Comprehensive loss comprises net loss and certain changes in stockholders deficit that are
excluded from net loss. We include in other comprehensive loss those foreign currency adjustments
related to the translation of the assets and liabilities of Matritech GmbH into U.S. dollars as the
functional currency of Matritech GmbH is the euro. The composition of comprehensive loss is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Net loss
|
|
$
|
(2,939,457
|
)
|
|
$
|
(4,828,683
|
)
|
|
$
|
(9,599,180
|
)
|
|
$
|
(13,553,162
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(20,414
|
)
|
|
|
40,013
|
|
|
|
45,894
|
|
|
|
67,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,959,871
|
)
|
|
$
|
(4,788,670
|
)
|
|
$
|
(9,553,286
|
)
|
|
$
|
(13,486,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
(e) Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, (SFAS 123R),
Share-Based Payment
, which establishes accounting for
equity instruments exchanged for employee services. Under the provisions of SFAS 123R, share-based
compensation cost is measured at the grant date, based on the calculated fair value of the award,
and is recognized as an expense over the employees requisite service period (generally the vesting
period of the equity grant).
(f) Net Loss per Common Share
We compute earnings per share in accordance with SFAS No. 128,
Earnings per Share
. Basic net
loss per common share is computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted loss per share is
the same as basic loss per share as the effects of our potential dilutive common shares are
anti-dilutive. Potential common stock equivalents consist of stock options, warrants and
restricted stock units, convertible preferred stock and Secured Convertible Notes. The number of
anti-dilutive securities excluded from the computation of diluted loss per share was 31,846,840 and
39,417,156 for the periods ended September 30, 2006 and 2007, respectively.
(g) Recent Accounting Pronouncements
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48 (FIN 48),
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No.
109
, on January 1, 2007. This interpretation prescribes new methodology by which we must measure,
report, present, and disclose in our financial statements the effects of any uncertain tax return
reporting positions that we have taken or expect to take. The interpretation requires financial
statement reporting of the expected future tax consequences of uncertain tax return reporting
positions on the presumption that all relevant tax authorities possess full knowledge of the tax
reporting positions as well as all of the pertinent facts and circumstances, but it prohibits any
discounting of these effects for the time value of money. In addition, the interpretation also
mandates expanded financial statement disclosure about uncertainty in tax reporting positions. As
a result of the implementation of FIN 48, we recorded no adjustment for unrecognized income tax
benefits. At the adoption date of January 1, 2007 and also at September 30, 2007, we had no
unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits will
significantly increase in the next twelve months. We recognize interest and penalties related to
uncertain tax positions in income tax expense. As of September 30, 2007, we had no accrued
interest or penalties related to uncertain tax positions. The tax years 2003 through 2006 remain
open to examination by the major taxing jurisdictions to which we are subject, which are primarily
the United States and Germany. In addition, carryforward attributes that were generated prior to
2003 may still be adjusted upon examination if they either have been or will be used in a future
period.
At December 31, 2006, we had federal and state net operating loss carryforwards (NOL) of
approximately $79,623,000 and $36,620,000, respectively, expiring at various dates from 2007
through 2026. At December 31, 2006, we had federal and state research and experimentation (R&D)
credit carryforwards of approximately $1,671,000 and $1,159,000, respectively, which will, if not
used, expire at various dates from 2007 through 2026.
Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual
limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code
of 1986, as well as similar state and foreign provisions that have occurred previously or that
could occur in the future. These ownership changes may limit the amount of NOL and R&D credit
carryforwards that can be utilized annually to offset future taxable income and tax, respectively.
In general, an ownership change, as defined by Section 382, results from transactions increasing
the ownership of certain shareholders or public groups in the stock of a corporation by more than
50 percentage points over a three-year period. If we have experienced a change of control at any
time since our formation, utilization of our NOL or R&D credit carryforwards would be subject to an
annual limitation under Section 382 which is determined by first multiplying the value of our stock
at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be
subject to additional adjustments, as required. Any limitation may result in expiration of a
portion of the NOL or R&D credit carryforwards before utilization. No amounts are currently being
reported as an uncertain tax position under FIN 48.
3. Stockholders Deficit
On March 4, 2005, we sold 670,272 shares of Series A Preferred Stock initially convertible
into 6,702,720 shares of our common stock and warrants to purchase 4,991,434 shares of our common
stock (the 2005 Warrants), for aggregate consideration of $5,898,394 (before cash commissions and
expenses of approximately $610,000). In addition, we issued
9
warrants to a placement agent for a
total of 656,920 shares of common stock (with a value of approximately $562,000). Both
the 2005 Warrants and the placement agent warrants (collectively, the March 2005 Warrants)
had an initial exercise price of $1.47 per share, became exercisable on September 5, 2005, and
expire on March 4, 2010.
See Note 5, Secured Convertible Notes, for information about changes in the conversion rates
for the Series A Preferred Stock and the exercise price of the March 2005 Warrants.
During the three and nine month periods ended September 30, 2006, investors exercised their
rights to convert 0 and 487,852 shares of Series A Preferred Stock into 0 and 6,133,000 shares of
common stock, respectively. No investors exercised their rights to convert shares of Series A
Preferred Stock into shares of common stock for the three and nine month periods ended September
30, 2007.
Warrant Repurchase
On July 27, 2007, we entered into an Agreement and Amendment to our Secured Convertible Notes
(the Agreement and Amendment) with the holders of a majority of outstanding principal value of
our 2006 Secured Convertible Notes and the holders of a majority of outstanding principal value of
our 2007 Secured Convertible Notes. The Agreement and Amendment authorized the redemption of the
outstanding warrants we originally issued on March 31, 2003 (the 2003 Warrants). We decided to
repurchase the 2003 Warrants in anticipation of entering into a strategic transaction.
On July 31, 2007, we entered into Purchase and Sale Agreements with all holders of 2003
Warrants, pursuant to which we redeemed the 2003 Warrants for a purchase price of $0.04 per share.
In addition to the $0.04 purchase price to redeem the warrants, the Purchase and Sale Agreements
also provided for potential additional payments to be made to the holders if, prior to April 1,
2008, we engaged in a transaction that would have triggered an anti-dilution adjustment to the
exercise price of the redeemed 2003 Warrants.
Between July 31 and August 10, 2007, pursuant to the terms of the Purchase and Sale Agreements
with the warrant holders, we paid an aggregate of approximately $31,373 to redeem the 2003
Warrants.
4. Convertible Debentures Issued March 2003
A summary of our convertible debt accounting for the convertible debentures issued in March
2003 (the March 2003 Convertible Debentures) is as follows:
|
|
|
|
|
Proceeds at closing in March 2003
|
|
$
|
5,000,000
|
|
Less:
|
|
|
|
|
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
|
|
|
4,558,000
|
|
|
|
|
|
Balance, March 31, 2006
|
|
$
|
|
|
|
|
|
|
The debt discount was amortized as interest expense using the effective interest method over
the term of the debt. This debt was fully repaid as of March 31, 2006. For the three and nine
month periods ended September 30, 2006, $0 and $134,000, respectively, representing amortization of
the debt discount, are included in interest expense.
Debt issuance costs attributable to the March 2003 Convertible Debentures, which totaled
approximately $475,000, have been capitalized as other assets and other current assets on the
condensed balance sheet and were amortized based on the effective interest method over the term of
the debt. For the three and nine month periods ended September 30, 2006, we
10
included $0 and $7,000, respectively, (representing amortization of these costs) in interest
expense. As of December 31, 2006, there were no unamortized debt issuance costs related to the
March 2003 Convertible Debentures.
5. Secured Convertible Notes
2006 Secured Convertible Notes Issued January 2006
On January 13, 2006, we entered into a purchase agreement and related documents, pursuant to
which we sold the 2006 Secured Convertible Notes, which were initially convertible into 10,766,092
shares of our common stock, and accompanying warrants to purchase up to 6,459,655 shares of our
common stock (2006 Purchaser Warrants), for an aggregate consideration of $6,997,960 (before cash
commissions and expenses of approximately $813,000). The 2006 Secured Convertible Notes bear
interest at the rate of 15% per annum. The 2006 Secured Convertible Notes were initially
convertible into shares of our common stock at a conversion price of $0.65 per share of common
stock and matured on January 13, 2009. The 2006 Purchaser Warrants, which became exercisable on
July 14, 2006 and expire on January 13, 2011, had an initial exercise price of $0.67 per share.
Both the conversion price of the 2006 Secured Convertible Notes and the exercise price of the 2006
Warrants are subject to adjustment in the event of subsequent dilutive issuances. In addition, we
issued warrants to two placement agents for a total of 1,036,609 shares of our common stock (2006
Agent Warrants and collectively with the 2006 Purchaser Warrants, the 2006 Warrants). The 2006
Agent Warrants, which became exercisable on July 14, 2006 and expire on January 13, 2011, had an
initial exercise price of $0.65 per share, and are also subject to adjustments in the event of
subsequent dilutive issuances. Our sale of the 2007 Secured Convertible Notes was deemed to be a
dilutive issuance under the terms of the 2006 Secured Convertible Notes and 2006 Warrants. As a
result, both the conversion price of the 2006 Secured Convertible Notes and the exercise price of
the 2006 Warrants were adjusted to $0.63 per share. We had previously reserved shares sufficient
to cover this adjustment in conversion price. In addition, in connection with the sale of the 2007
Secured Convertible Notes we entered into an agreement with the holders of a majority of the
outstanding principal value of the 2006 Secured Convertible Notes that shortened the scheduled
maturity date of the 2006 Secured Convertible Notes to December 13, 2007.
The proceeds of approximately $6,998,000 and the closing costs of $1,285,000 were allocated to
our balance sheet in the following manner:
|
|
|
|
|
|
|
|
|
|
|
Allocation of
|
|
|
Allocation of
|
|
|
|
of
|
|
|
Associated
|
|
Instrument
|
|
Proceeds
|
|
|
Costs
|
|
2006 Secured Convertible Notes
|
|
$
|
4,884,000
|
|
|
$
|
912,000
|
|
2006 Purchaser Warrants
|
|
|
1,808,000
|
|
|
|
337,000
|
|
Registration Rights Liability
|
|
|
306,000
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,998,000
|
|
|
$
|
1,285,000
|
|
|
|
|
|
|
|
|
The allocation of the total proceeds among these elements requires us to separately record the
registration rights liability at its full fair value (approximately $306,000) and then allocate the
remaining value between the 2006 Purchaser Warrants and the 2006 Secured Convertible Notes based on
their relative fair values. The fair value of the registration rights liability was determined
using a probability weighted discounted cash flow technique based on the potential cash penalties,
and subsequent changes in its fair value are reflected in the statement of operations. We valued
the 2006 Purchaser Warrants using the Black-Scholes pricing model with the following assumptions:
dividend yield of zero percent; expected volatility of 68%; risk free interest rate of 4.14% and a
term of five years.
Total closing costs were approximately $1,285,000 and included the costs associated with 2006
Agent Warrants, which we valued at approximately $472,000 using the same method used for valuing
the 2006 Purchaser Warrants. Debt issuance costs of $912,000 were allocated to the 2006 Secured
Convertible Notes, have been capitalized as other assets on our condensed consolidated balance
sheet and are being amortized based on the effective interest rate method over the term of the 2006
Secured Convertible Notes. The $337,000 of costs allocated to the 2006 Purchaser Warrants were
deducted from the net proceeds attributable to the 2006 Purchaser Warrants. We expensed $36,000 of
costs allocated to the registration rights liability upon the closing of this transaction.
The difference between the effective conversion price of the 2006 Secured Convertible Notes
and the fair value of our common stock on the date of issuance of the 2006 Secured Convertible
Notes equals the beneficial conversion feature calculated in accordance with EITF Issue No. 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments
. The
11
first step in this calculation shown below divides the value allocated above to the 2006
Secured Convertible Notes by the shares issued upon conversion to determine the effective
conversion price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value of 2006
Secured
|
|
|
|
|
|
Value Allocated to 2006
|
|
|
|
|
Convertible Notes
|
|
$
|
6,998,000
|
|
|
Secured Convertible Notes
|
|
$
|
4,884,000
|
|
Shares Upon Conversion
|
|
|
10,766,092
|
|
|
Shares Upon Conversion
|
|
|
10,766,092
|
|
Conversion Price
|
|
$
|
0.65
|
|
|
Effective Conversion Price
|
|
$
|
0.454
|
|
The second step in this calculation, as shown below, determines the discount to market based
on the effective conversion price and uses this discount to determine the beneficial conversion
feature:
|
|
|
|
|
Closing Price January 13, 2006
|
|
$
|
0.73
|
|
Effective Conversion Price
|
|
$
|
0.454
|
|
Discount to Market per Share
|
|
$
|
0.276
|
|
Shares Upon Conversion
|
|
|
10,766,092
|
|
Beneficial Conversion Feature
|
|
$
|
2,975,000
|
|
This beneficial conversion feature of approximately $2,975,000 was recorded as a debt discount
and resulted in a carrying value for the 2006 Secured Convertible Notes of $1,909,000 at closing.
The difference between the carrying value recorded at closing and the $6,998,000 face value of the
2006 Secured Convertible Notes is being accreted through December 13, 2007 using the effective
interest rate method.
When note holders convert any of the 2006 Secured Convertible Notes prior to maturity, the
proportionate share of the remaining unamortized debt discount, debt issuance costs and beneficial
conversion feature related to the amount of converted principal is charged to expense in the
current period and the amount remaining is charged to expense over the remaining term of the 2006
Secured Convertible Notes.
The sale of the 2006 Secured Convertible Notes was deemed to be a dilutive issuance under the
terms of the Series A Preferred Stock and our March 2005 Warrants. As a result, the price per
share at which the Series A Preferred Stock became convertible into common stock was reduced from
$0.88 to $0.70 and the exercise price of the March 2005 Warrants was reduced from $1.47 to $1.34
per share. Both the $0.70 conversion price and the $1.34 warrant exercise price are the
established floors for these securities and no further price reductions will occur as a result of
any future dilutive issuances. We had previously reserved shares sufficient to cover the
adjustment in conversion price.
For the three and nine month periods ended September 30, 2006 and 2007, we included $87,000
and $133,000, respectively, and $310,000 and $378,000, respectively, (representing amortization of
deferred financing costs) in interest expense. For the three and nine month periods ended
September 30, 2006 and 2007, we included $488,000 and $774,000, respectively, and $1,728,000 and
$2,287,000, respectively, (representing accretion of debt discount and beneficial conversion
feature) in interest expense. For the three and nine month periods ended September 30, 2006 and
2007, we included $0 and $174,000, respectively, and $0 and $174,000, respectively, (representing
accretion of premium) in interest expense.
During the three and nine month periods ended September 30, 2006 and 2007, there were $30,000
and $0, respectively, and $785,000 and $0, respectively, of optional conversions of principal of
the 2006 Secured Convertible Notes by holders into equity. In the first nine months of 2007, we
issued stock to holders of the 2006 Secured Convertible Notes as payment of principal and interest.
In the first, second and third quarters of 2007 we made interest payments of $925,000, $259,000,
and $13,000, respectively in stock by issuing 1,594,658, 645,074 and 46,338 shares of our common
stock, respectively. We also made principal payments in the first, second and third quarters of
2007 of $862,000, $569,000 and $28,000, respectively, by issuing 1,550,197, 1,434,612 and 96,376
shares of our common stock, respectively. In the third quarter of 2007, we also paid approximately
$55,000 in cash as payment of the August and September 2007 principal payments due on the 2006
Secured Convertible Notes.
We need to comply with all stock payment conditions of the 2006 Secured Convertible Notes in
order to make payments in shares of our common stock. Those stock payment conditions include a
requirement that our common stock be selling at $0.40 per share or higher. Our common stock has
not traded at or above $0.40 per share since June 12, 2007. In the third quarter of 2007, holders
of our 2006 Secured Convertible Notes elected to defer approximately $107,000 of interest payments
due in July 2007 and approximately $973,000 of principal due from June, July, August and September
2007 until the earlier of (i) a sale of substantially all our assets or a merger or (ii) the
scheduled maturity date of December 13, 2007. At September 30, 2007, holders of approximately 95%
of the outstanding principal value of our 2006 Secured Convertible Notes had agreed to defer
receipt of further payments on the 2006 Secured Convertible Notes until the earlier of (i) a sale
of substantially all our assets or a merger or (ii) the scheduled maturity date of December 13,
2007.
12
In the third quarter of 2007, we and the holders of a majority of outstanding principal value
of the 2006 Secured Convertible Notes entered into an Agreement and Amendment pursuant to which the
signing holders agreed not to issue a default notice (as defined in the 2006 Secured Convertible
Notes) until the later of (a) ten business days after a registration statement on Form S-3 is
declared effective by the Securities and Exchange Commission for the resale by us of shares of
Inverness common stock we receive as proceeds of the Asset Sale or (b) the date of the closing of
the Asset Sale. The holders forbearance on issuance of a default notice is limited to a maximum
of ninety days after the closing of the Asset Sale. In addition, we agreed to pay to the signing
holders a 15% prepayment premium, already designated in the 2006 Secured Convertible Notes, upon
repayment of these notes held by the signing holders, regardless of the date of repayment. The
Agreement and Amendment further provides that the signing holders shall not be entitled to both a
default amount (as defined in the 2006 Secured Convertible Notes) and a prepayment premium. The
prepayment premium is being amortized to interest expense through December 13, 2007 using the
effective interest method.
A summary of the accounting for the 2006 Secured Convertible Notes is as follows:
|
|
|
|
|
Proceeds at closing in January 2006
|
|
$
|
6,998,000
|
|
Less:
|
|
|
|
|
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
|
|
|
1,909,000
|
|
Add back:
|
|
|
|
|
Cumulative principal payments made in stock
|
|
|
(2,339,000
|
)
|
Cumulative principal payments made in cash
|
|
|
(55,000
|
)
|
Cumulative amortization of debt discount and beneficial conversion features
|
|
|
4,626,000
|
|
Cumulative accretion of premium
|
|
|
174,000
|
|
Less:
|
|
|
|
|
Additional beneficial conversion feature calculated and recorded as debt discount
|
|
|
(208,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
4,107,000
|
|
|
|
|
|
Minimum future payments on the debt are as follows:
|
|
|
|
|
Total payments
|
|
$
|
5,752,000
|
|
Less: Portion related to periodic interest payments
|
|
|
(398,000
|
)
|
Non-cash interest related to debt discount
|
|
|
(671,000
|
)
|
Portion related to premium payments
|
|
|
(576,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
4,107,000
|
|
|
|
|
|
|
Current portion
|
|
$
|
4,107,000
|
|
In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2,
Accounting for
Registration Payment Arrangements
, (EITF 00-19-2), which addresses an issuers accounting for
registration payment arrangements. EITF 00-19-2 specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with FASB Statement No.
5,
Accounting for Contingencies
. The guidance in EITF 00-19-2 amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities
, and No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
, and FASB Interpretation
No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, to include scope exceptions for registration payment
arrangements.
EITF 00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with US GAAP without regard to the
contingent obligation to transfer consideration pursuant to the registration payment arrangement.
Upon adoption of EITF 00-19-2, we applied the recognition and measurement provisions of EITF
00-19-2 to the outstanding registration rights associated with the 2006 Secured Convertible Notes.
As result, we believe that the contingent obligation to make future payments is not probable upon
adoption of EITF 00-19-2. Therefore, we have reported a change in accounting principle through a
cumulative-effect adjustment to the opening balance of accumulated deficit upon adoption of EITF
00-19-2 of approximately $325,000 by debiting registration rights liability and crediting
accumulated deficit.
13
2007 Secured Convertible Notes Issued January 2007
On January 19, 2007, upon the receipt of the consent of the holders of at least 75% of the
outstanding Series A Preferred Stock, we amended our Certificate of Designations, Preferences and
Rights of the Series A Preferred Stock, to increase the amount of indebtedness we may incur, assume
or suffer to permit from $7,500,000 to $12,000,000. On January 22, 2007, we entered into two new
agreements with the holders of a majority of the outstanding principal value of our 2006 Secured
Convertible Notes, which included a Consent under the 2006 Secured Convertible Notes (the
Consent) and the Agreement and Amendment to the which included the 2006 Secured Convertible
Notes. The execution of these two agreements was completed contemporaneously with the sale of the
2007 Secured Convertible Promissory Notes.
The Consent allowed us to issue the 2007 Secured Convertible Notes, in an aggregate principal
amount not to exceed $4.5 million, which rank the 2007 Secured Convertible Notes on a pari passu
basis with the 2006 Secured Convertible Notes as to payment and security and allowed us to incur
increased indebtedness to cover the 2007 Secured Convertible Notes in addition to the outstanding
indebtedness under the 2006 Secured Convertible Notes. The Consent also directed the collateral
agent for the holders of the 2006 Secured Convertible Notes to consent to and to enter into an
amendment and restatement of the existing security agreement and contingent license agreement so
that the holders of the 2007 Secured Convertible Notes would have a pari passu position with the
holders of the 2006 Secured Convertible Notes.
The Agreement and Amendment changed the potential events of default under the 2006 Secured
Convertible Notes also to include non-payment of, or default on another obligation related to, the
2007 Secured Convertible Notes; shortened the scheduled maturity date of the 2006 Secured
Convertible Notes to December 13, 2007; eliminated certain Stock Payment Conditions (as defined in
the 2006 Secured Convertible Notes), including the volume trading limitation, provided for the
designation by ProMed Partners, L.P. of a representative, initially David B. Musket, to our Board
of Directors and made further changes to the 2006 Secured Convertible Notes primarily to reflect
events occurring since their issuance in January 2006.
On January 22, 2007, we also entered into a purchase agreement and related documents, pursuant
to which we sold the 2007 Secured Convertible Notes, which were initially convertible into
6,928,572 shares of our common stock, and accompanying warrants to purchase up to 4,157,143 shares
of our common stock (the 2007 Purchaser Warrants), for an aggregate consideration of
approximately $4,365,000 million (before cash commissions and expenses of approximately $520,000).
The 2007 Secured Convertible Notes are convertible into shares of our common stock at an initial
conversion price of $0.63 per share of common stock and bear interest at the rate of 15% per annum.
The 2007 Purchaser Warrants, exercisable over a five year period from their date of issuance, have
an exercise price of $0.63 per share. We also issued to a placement agent warrants to purchase, at
any time within five years of issuance, up to 55,556 shares of our common stock at an exercise
price of $0.76 per share (the 2007 Agent Warrants and collectively with the 2007 Purchaser
Warrants, the 2007 Warrants). Both the conversion price and the exercise prices of these
securities are subject to adjustment in the event of subsequent dilutive issuances as a result of
the approval by our stockholders in June 2007 of a proposal to allow issuances of shares at a price
below $0.63 per share.
The 2007 Secured Convertible Notes mature December 13, 2007 and allow for payment of both
principal and interest in shares of our common stock, so long as certain stock payment conditions
are satisfied. The conversion price for payments to be made in stock is the lower of the then
conversion price, currently $0.63, or 85% of the 10 day volume weighted average price of common
stock (the 10-day VWAP) on AMEX at the time any payment is due. Interest is payable quarterly,
in arrears, beginning in June 2007, and principal payments are due monthly beginning in July 2007.
We must meet all of the following stock payment conditions in order to make interest and
principal payments on the 2007 Secured Convertible Notes in shares of our common stock instead of
cash: (i) issuance of the shares of common stock will not result in a 2007 Secured Convertible Note
holder and its affiliates owning more than 9.99% of the outstanding shares of our common stock,
unless waived by the holder; (ii) the number of shares to be issued to all holders of Secured
Convertible Notes on a specific payment date shall not exceed 20% of the trading volume (as
reported by Bloomberg) of our common stock for the period of 20 consecutive trading days ending on
the trading day immediately prior to such payment date; (iii) our common stock is not selling at a
price below $0.40 per share; and (iv) we have not issued any notice relating to the redemption of
any warrant(s) during the 30 day period immediately prior to the payment date. Our common stock
has not traded at or above $0.40 per share since June 12, 2007.
While the 2007 Secured Convertible Notes are outstanding, we are restricted from incurring
additional indebtedness (other than receivables financing not to exceed 80% of receivables and
equipment purchase or lease financing not to exceed $200,000) and from paying cash dividends or
redeeming securities. In connection with the sale of our 2007 Secured Convertible Notes, we
entered into an amended and restated security agreement and an amended and restated contingent
license agreement with the collateral agent, SDS Capital Group SPC, Ltd. As a result, our
obligations under the 2007 Secured
14
Convertible Notes (as well as the 2006 Secured Convertible Notes) are secured by liens against
certain assets related to our NMP22 product line. The security interest covers cell lines,
equipment, inventory and general intangibles related to the NMP22 product line, as well as proceeds
from the sale of the product line. We also entered into an amended and restated contingent license
agreement with the collateral agent granting license rights in the field of bladder cancer
detection to some of our patents related to the NMP22 products, sublicense rights to patents
licensed to us and used in connection with the NMP22 product line, and license rights to trademarks
used exclusively in connection with the NMP22 product line. The contingent license allows the
collateral agent to rely on and use the licensed patent rights if we default in our payment
obligations under the Secured Convertible Notes. The license rights will terminate upon payment in
full of all amounts payable under the Secured Convertible Notes or earlier upon the expiration date
of the underlying licensed patents.
We have granted the holders of the 2007 Secured Convertible Notes or the holders of shares of
our common stock issued upon conversion of the 2007 Secured Convertible Notes, either cumulatively
valued at or in excess of $250,000, the right to participate in future equity-based financing
transactions, up to a maximum of 50% of the new transaction. Holders of the 2007 Secured
Convertible Notes may not generally exercise these rights if they have exercised similar rights
under the 2006 Secured Convertible Notes. If, however, all participating holders of the Secured
Convertible Notes do not elect to purchase the full 50% of a future financing transaction, then
those holders who have exercised rights under only the 2006 Secured Convertible Notes or the 2007
Secured Convertible Notes will have the right to further participate based on their cumulative
holdings of their other years Secured Convertible Notes. The holders of the 2007 Secured
Convertible Notes who qualify for participation rights in our future financing transactions also
have the right to exchange up to 50% of the then-held principal value of their 2007 Secured
Convertible Notes for participation in the transaction, subject to an overall restriction for all
holders that limits them to an aggregate of 50% of each future financing transaction.
The 2007 Secured Convertible Notes require us to pay interest and liquidated damages and may
become immediately due and payable in cash at a premium of 120% of the outstanding principal amount
plus accrued interest and damages in the event we default under their terms. Potential defaults
would include, among other things:
|
|
|
our 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.
|
Under the terms of the transaction documents for the 2007 Secured Convertible Notes, we may be
required to file with the SEC a registration statement covering the shares into which the 2007
Secured Convertible Notes may be converted and the shares for which the 2007 Warrants may be
exercised if the purchasers holding at least 22% of the aggregate amount of securities initially
acquired in the sale of the 2007 Secured Convertible Notes, based on the conversion price in effect
at the time of filing the registration statement, demand that we file such a registration
statement. No demand for registration has been made and, in view of our stock trading price, we do
not expect any request to be made. If a demand is made, we will have 90 days in which to have a
registration statement declared effective (or 150 days in the event the registration statement is
reviewed by the SEC). We are also obligated to keep our stock listed for trading on AMEX, NYSE or
Nasdaq. If, after demand, we fail to register the shares we have committed to register on a timely
basis other than if the SEC will not declare the registration statement effective due to
interpretations of Rule 415 of the Securities Act of 1933, we may be subject to penalties,
including payment of 1.5% of the consideration paid for the 2007 Secured Convertible Notes for each
thirty day period of delay in registration. Further, we agreed to seek, and we received in June
2007, stockholder approval of the issuance of our common stock in satisfaction of our obligations
under the 2007 Secured Convertible Notes and upon exercise of the 2007 Warrants at a conversion
price or exercise price below $0.63 per share.
15
The sale of the 2007 Secured Convertible Notes and the 2007 Purchaser Warrants has been deemed
to be a dilutive issuance under the terms of our 2006 Secured Convertible Notes and the 2006
Warrants. As a result, as of January 22, 2007, the 2006 Secured Convertible Notes became
convertible at a price of $0.63 per share, and the exercise price of the 2006 Warrants was reduced
to $0.63 per share. We had previously reserved shares sufficient to cover this adjustment in
conversion price. We have calculated an additional beneficial conversion charge totaling
approximately $208,000, which was recorded as a debt discount in the first quarter of 2007 and will
be amortized as interest expense over the remaining life of the 2006 Secured Convertible Notes.
The offer and sale of securities in the transaction described above was exempt from
registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and
Regulation D promulgated thereunder, as a transaction by an issuer not involving any public
offering. The recipients of securities in this transaction represented to us that they acquired
the securities for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities issued in this
transaction.
The proceeds of approximately $4,365,000 and the closing costs of $542,000 were allocated in
the following manner:
|
|
|
|
|
|
|
|
|
|
|
Allocation of
|
|
|
Allocation of
|
|
|
|
Of
|
|
|
Associated
|
|
Instrument
|
|
Proceeds
|
|
|
Costs
|
|
2007 Secured Convertible Notes
|
|
$
|
3,178,000
|
|
|
$
|
395,000
|
|
2007 Purchaser Warrants
|
|
|
1,187,000
|
|
|
|
147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,365,000
|
|
|
$
|
542,000
|
|
|
|
|
|
|
|
|
The total proceeds of $4,365,000 were allocated between the 2007 Purchaser Warrants and the
2007 Secured Convertible Notes based on their relative fair values. We valued the 2007 Purchaser
Warrants using the Black-Scholes pricing model with the following assumptions: dividend yield of
zero percent; expected volatility of 68%; risk free interest rate of 4.24% and a term of five
years. In accordance with EITF 00-19-2, we did not record a liability associated with the
registration rights from the 2007 Secured Convertible Notes since the obligation regarding the
registration rights is not probable.
Total closing costs were approximately $542,000 and included the costs associated with the
2007 Agent Warrants, which we valued at approximately $23,000 using the same method used for
valuing the 2007 Purchaser Warrants. Debt issuance costs of $395,000 were allocated to the 2007
Secured Convertible Notes and have been capitalized as other assets on our condensed consolidated
balance sheet and are being amortized based on the effective interest rate method over the term of
the 2007 Secured Convertible Notes. The $147,000 of costs allocated to the 2007 Purchaser Warrants
were deducted from the net proceeds attributable to the 2007 Purchaser Warrants.
The difference between the effective conversion price of the 2007 Secured Convertible Notes
and the fair value of our common stock on the date of issuance of the 2007 Secured Convertible
Notes equals the beneficial conversion feature calculated in accordance with EITF 00-27. The first
step in this calculation, as shown below divides the value allocated above to the 2007 Secured
Convertible Notes by the number of shares issued upon conversion to determine the effective
conversion price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value of 2007 Secured
|
|
|
|
|
|
Value Allocated to 2007
|
|
|
|
|
Convertible Notes
|
|
$
|
4,365,000
|
|
|
Secured Convertible Notes
|
|
$
|
3,178,000
|
|
Shares Upon Conversion
|
|
|
6,928,571
|
|
|
Shares Upon Conversion
|
|
|
6,928,571
|
|
Conversion Price
|
|
$
|
0.63
|
|
|
Effective Conversion Price
|
|
$
|
0.459
|
|
The second step in this calculation, as shown below, determines the discount to market based
on the effective conversion price and uses this discount to determine the beneficial conversion
feature:
|
|
|
|
|
Closing Price January 22, 2007
|
|
$
|
0.70
|
|
Effective Conversion Price
|
|
$
|
0.459
|
|
Discount to Market per Share
|
|
$
|
0.241
|
|
Shares Upon Conversion
|
|
|
6,928,571
|
|
Beneficial Conversion Feature
|
|
$
|
1,670,000
|
|
This beneficial conversion feature of approximately $1,670,000 was recorded as a debt discount
and resulted in a carrying value for the 2007 Secured Convertible Notes of $1,508,000 at closing.
The difference between the carrying value recorded at
16
closing and the $4,365,000 face value of the 2007 Secured Convertible Notes is being accreted
over their 11 month term using the effective interest rate method.
If note holders convert any of the 2007 Secured Convertible Notes prior to maturity, the
proportionate share of the remaining unamortized debt discount, debt issuance costs and beneficial
conversion feature related to the amount of converted principal will be charged to expense in the
current period and the amount remaining will be charged to expense over the remaining term of the
2007 Secured Convertible Notes.
In the third quarter of 2007, the holders of our 2007 Secured Convertible Notes elected to
defer approximately $398,000 of interest payments, including some previously postponed until July
2007, and approximately $2,033,000 of principal due from July, August and September 2007 until the
earlier of (i) a sale of substantially all our assets or a merger or (ii) the scheduled maturity
date of December 13, 2007. In the third quarter of 2007, we paid approximately $10,000 in cash as
payment of interest due on the 2007 Secured Convertible Notes and we paid approximately $150,000 in
cash as payment of principal payments due on the 2007 Secured Convertible Notes.
In the third quarter of 2007, we and the holders of a majority of outstanding principal value
of the 2007 Secured Convertible Notes entered into an Agreement and Amendment pursuant to which the
signing holders agreed not to issue a default notice (as defined in the 2007 Secured Convertible
Notes) until the later of (a) ten business days after a registration statement on Form S-3 is
declared effective by the Securities and Exchange Commission for the resale by us of shares of
Inverness common stock we receive as proceeds of the Asset Sale or (b) the date of the closing of
the Asset Sale. The holders forbearance on issuance of a default notice is limited to a maximum
of ninety days after the closing of the Asset Sale. In addition, we agreed to pay to the signing
holders a prepayment premium, already designated in the 2007 Secured Convertible Notes, upon
repayment of these notes held by the signing holders, regardless of the date of repayment. We and
the signing holders further agreed to amend the 2007 Secured Convertible Notes of those holders to
provide that the default amount (as defined in the 2007 Secured Convertible Notes) shall include a
premium of 25%, rather than 20%, to make it equivalent to the amount of prepayment premium. The
Agreement and Amendment further provides that the signing holders shall not be entitled to both a
default amount (as defined in the 2007 Secured Convertible Notes) and a prepayment premium. The
prepayment premium is being amortized to interest expense through December 13, 2007 using the
effective interest method.
For the three and nine month periods ended September 30, 2007, we included $102,000 and
$307,000, respectively, representing amortization of deferred financing costs, and $735,000 and
$2,222,000, respectively, representing accretion of debt discount and beneficial conversion
feature, in interest expense related to the 2007 Secured Convertible Notes. For the nine month
period ended September 30, 2007, we paid approximately $28,000 in cash as payment of interest on
the 2007 Secured Convertible Notes.
A summary of the accounting for the 2007 Secured Convertible Notes is as follows:
|
|
|
|
|
Proceeds at closing in January 2007
|
|
$
|
4,365,000
|
|
Less:
|
|
|
|
|
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
|
|
|
1,508,000
|
|
Add back:
|
|
|
|
|
Cumulative principal payments made in stock
|
|
|
|
|
Cumulative principal payments made in cash
|
|
|
(150,000
|
)
|
Cumulative amortization of debt discount and beneficial conversion features
|
|
|
2,221,000
|
|
Cumulative accretion of premium
|
|
|
265,000
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
3,844,000
|
|
|
|
|
|
Minimum future payments on the debt are as follows:
|
|
|
|
|
Total payments
|
|
$
|
5,954,000
|
|
|
Less: Portion related to periodic interest payments
|
|
|
(548,000
|
)
|
Non-cash interest related to debt discount
|
|
|
(636,000
|
)
|
Portion related to premium payments
|
|
|
(926,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
3,844,000
|
|
|
|
|
|
Current portion
|
|
$
|
3,844,000
|
|
17
6. Notes Payable
On August 30, 2007, we entered into a securities purchase agreement (the Purchase Agreement)
with accredited investors pursuant to which we sold the Series C Notes for an aggregate purchase
price of $3,500,000 (the Financing). The Series C Notes bear interest at the rate of 15% per
annum for the first ninety days after issuance and thereafter bear interest at the rate of 18% per
annum. The scheduled maturity date of the Series C Notes is December 13, 2007, or earlier in the
event of the consummation of a change of control. At the time of repayment, regardless of whether
the Series C Notes are paid at the maturity date, we must also pay a premium of 29% of the
principal amount outstanding. The premium will be amortized to interest expense using the
effective interest method over the life of the Series C Notes.
Prior to the Financing, on August 10, 2007, we amended our Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock of Matritech, Inc. with the written
consent of the holders of more than 75% of the outstanding Series A Preferred Stock, to increase
the amount of indebtedness we may incur, assume or suffer to permit without the prior consent of
the holders of at least 75% of the outstanding Series A Preferred Stock from $12,000,000 to
$15,300,000. On August 9, 2007, we also entered into a Consent with the holders of a majority of
outstanding principal value of our 2006 Secured Convertible Notes and the holders of a majority of
outstanding principal value of our 2007 Secured Convertible Notes to allow us to incur an increased
amount of indebtedness sufficient to permit us to issue additional notes in an aggregate principal
amount not to exceed $3.5 million and ranking on a pari passu basis with the Secured Convertible
Notes as to payment and security. The Consent also directed the collateral agent for the holders
of the Secured Convertible Notes to consent to and enter into an amendment and restatement of the
existing security agreement and contingent license agreement so that the holders of the additional
notes would have a pari passu position with the holders of the Secured Convertible Notes.
In connection with the Financing, we entered into a Second Amended and Restated Security
Agreement with the collateral agent on behalf of itself and the holders of all of our Secured
Promissory Notes, pursuant to which we granted liens against certain assets related to our
NMP22
®
product line. The security interest covers cell lines, equipment, inventory and
general intangibles related to the NMP22 product line, as well as proceeds from the sale of the
product line. We also entered into a Second Amended and Restated Contingent License Agreement with
the collateral agent, granting license rights in the field of bladder cancer detection to some of
our patents related to the NMP22 products, sublicense rights to patents licensed to us and used in
connection with the NMP22 product line, and license rights to trademarks used exclusively in
connection with the NMP22 product line. In connection with the Financing, the holders of the
Series C Notes directed the collateral agent, at the closing of the Asset Sale to (i) release
existing collateral, terminate the Second Amended and Restated Security Agreement, terminate the
Second Amended and Restated Contingent License Agreement and terminate existing UCC-1 financing
statements, and (ii) enter into a pledge agreement, pursuant to which we will grant the collateral
agent a security interest in shares of Inverness common stock equal in value to 150% of the
outstanding amounts owed on the Series C Notes. On August 31, 2007, we and the holders of a
majority of outstanding principal value of the 2006 Secured Convertible Notes and of the 2007
Secured Convertible Notes entered into a Consent that also directs the collateral agent, at the
closing of the Asset Sale to (i) release existing collateral, terminate the Second Amended and
Restated Security Agreement, terminate the Second Amended and Restated Contingent License Agreement
and terminate existing UCC-1 financing statements, and (ii) enter into a pledge agreement, pursuant
to which we will grant the collateral agent a security interest in shares of Inverness common stock
equal in value to 150% of the outstanding amounts owed on the Secured Convertible Notes.
The Series C Notes may become immediately due and payable in cash at a premium of 129% of the
outstanding principal amount plus accrued interest and damages in the event we default under their
terms. Potential defaults would include, among other things:
|
|
|
our failure to make payments as they become due;
|
|
|
|
|
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;
|
|
|
|
|
our default on our existing or future liabilities in excess of $250,000, including
the Secured Convertible Notes; and
|
|
|
|
|
a breach of any material term of any other transaction document we entered into with
the purchasers of the Series C Notes.
|
18
The Series C Notes provide that the holders may not issue a default notice (as defined in the
Series C Notes) for our failure to pay any of the Secured Convertible Notes that become due as a
result of the closing of a change of control transaction, such as the Asset Sale, until the later
of (a) ten business days after a registration statement on Form S-3 is declared effective by the
Securities and Exchange Commission for the resale by us of shares of Inverness common stock we
receive as proceeds of the Asset Sale or (b) the date of the closing of the Asset Sale.
The offer and sale of securities in the transaction described above was exempt from
registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and
Regulation D promulgated thereunder, as a transaction by an issuer not involving any public
offering. The recipients of securities in this transaction represented to us that they acquired
the securities for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities issued in this
transaction.
We received net proceeds of approximately $3.4 million after deducting the estimated expenses
we incurred in connection with the Financing. We intend to use the net proceeds from the Financing
for general corporate purposes.
A summary of the accounting for Series C Notes is as follows:
|
|
|
|
|
Proceeds at closing in August 2007
|
|
$
|
3,500,000
|
|
Add back:
|
|
|
|
|
Cumulative accretion of premium
|
|
|
256,000
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
3,756,000
|
|
|
|
|
|
Minimum future payments on the debt are as follows:
|
|
|
|
|
Total payments
|
|
$
|
4,670,000
|
|
|
Less: Portion related to interest payments
|
|
|
(155,000
|
)
|
Portion related to premium payments
|
|
|
(759,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
3,756,000
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
3,756,000
|
|
7. Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS 123R, which establishes
accounting for equity instruments exchanged for employee services. Under the provisions of SFAS
123R, stock-based compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the employees requisite service period
(generally the vesting period of the equity grant).
The effect of recording stock-based compensation expense in our consolidated statement of
operations for the three and nine months ended September 30, 2006 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Cost of product sales
|
|
$
|
2,646
|
|
|
$
|
2,836
|
|
|
$
|
6,751
|
|
|
$
|
8,401
|
|
Research & development and clinical & regulatory expense
|
|
|
9,225
|
|
|
|
10,400
|
|
|
|
25,010
|
|
|
|
27,135
|
|
Selling, general and administrative expense
|
|
|
55,072
|
|
|
|
54,013
|
|
|
|
144,786
|
|
|
|
148,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in net loss
|
|
$
|
66,943
|
|
|
$
|
67,249
|
|
|
$
|
176,547
|
|
|
$
|
184,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Stock option activity for the nine month period ended September 30, 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Exercise Price Per
|
|
|
|
Number of Options
|
|
|
Share
|
|
Options outstanding, December 31, 2006
|
|
|
2,947,767
|
|
|
$
|
1.92
|
|
Granted
|
|
|
773,166
|
|
|
|
0.49
|
|
Exercised
|
|
|
|
|
|
|
|
|
Terminated
|
|
|
(257,637
|
)
|
|
|
1.87
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2007
|
|
|
3,463,296
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit activity for the nine month period ended September
30, 2007 is summarized as follows:
|
|
|
|
|
|
|
Number of
|
|
|
|
Shares/Units
|
|
Unvested at December 31, 2006
|
|
|
474,352
|
|
Granted
|
|
|
142,251
|
|
Vested
|
|
|
(89,857
|
)
|
Forfeitures
|
|
|
(29,400
|
)
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2007
|
|
|
497,346
|
|
|
|
|
|
|
Weighted average fair value of restricted stock and
restricted stock units granted in 2007
|
|
$
|
0.56
|
|
8. Contingencies
Intellectual Property Rights
Our NMP22 BladderChek Test is a point-of-care device which may infringe the intellectual
property rights of third parties. In August 2004, we entered into a license agreement, effective
as of April 1, 2004, with one holder of such patent rights, Abbott Laboratories. On November 3,
2006, we executed a supply agreement with Inverness, which holds substantial patent rights in the
lateral flow area covering the professional field, which includes licensed health care providers
and diagnostic laboratories. As part of this agreement, we have secured protection from claims by
Inverness of infringement of its lateral flow patent rights for products we purchase from Inverness
and resell in the professional field. Inverness has also agreed not to sue us, our resellers,
distributors and end-customers for infringement of these lateral flow patent rights for products
sold prior to November 3, 2006, the date of our agreement with Inverness. We do not expect our
future profit margins to be significantly affected by this new supply agreement. We may need to
secure additional licenses or other similar rights to lateral flow technology in the United States
or elsewhere. If we are required to obtain additional licenses, we cannot currently estimate the
extent of any liabilities we may incur or whether future profit margins will be significantly
affected by the arrangements we may negotiate.
20
9. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
Payroll and related costs
|
|
$
|
659,809
|
|
|
$
|
1,152,740
|
|
Professional fees
|
|
|
218,865
|
|
|
|
402,381
|
|
Interest on Secured Convertible Notes
|
|
|
889,844
|
|
|
|
722,754
|
|
Royalties
|
|
|
203,236
|
|
|
|
122,994
|
|
Deferred offering costs
|
|
|
10,402
|
|
|
|
51,482
|
|
Other
|
|
|
390,850
|
|
|
|
382,344
|
|
|
|
|
|
|
|
|
|
|
$
|
2,373,006
|
|
|
$
|
2,834,695
|
|
|
|
|
|
|
|
|
10. Asset Sale
On August 27, 2007, we entered into the Asset Purchase Agreement with Inverness and Milano, a
wholly owned subsidiary of Inverness, pursuant to which Milano has agreed to acquire substantially
all of our assets for aggregate consideration of $36 million, payable in Inverness common stock
(based on the weighted average closing price of Inverness common stock for the consecutive
10-trading day period ending on the second trading day immediately preceding the closing of the
Asset Sale). In addition, Milano may be required to pay up to an additional $2 million, which
Milano may elect to pay in cash and/or Inverness common stock, conditioned on the achievement of
certain revenue targets for the twelve month period following the closing. The closing of the
transaction is conditioned upon our receipt of (i) the approval of the transaction and the Asset
Purchase Agreement by the holders of 75% or more of the shares of our outstanding Series A
Preferred Stock; (ii) the approval of the transaction and the Asset Purchase Agreement by the
holders of a majority of our outstanding shares of both common and preferred stock, voting together
as a single class; and (iii) the consent of Inverness lender, if required, as well as the
satisfaction of regulatory and other customary conditions. If our stockholders approve the
transaction and the other conditions are satisfied, we expect the Asset Sale to close in the fourth
quarter of 2007. Following the closing of the Asset Sale and subject to the approval of our
stockholders, we intend to dissolve in compliance with the applicable provisions of the Delaware
General Corporation Law.
The Asset Purchase Agreement obligates Inverness to file with the Securities and Exchange
Commission a registration statement on Form S-4 covering the shares of Inverness common stock
comprising the purchase price for the Asset Sale, which registration statement shall include
Matritechs proxy statement in connection with our stockholder meeting to approve the Asset Sale
and subsequent dissolution. An initial version of this registration statement was filed on October
23, 2007. Inverness is obliged to file a registration statement on Form S-3on or before the end of
the trading day after closing of the Asset Sale, which registration statement will enable us to
promptly sell all of the shares of Inverness common stock received as consideration in the Asset
Sale. We intend to promptly sell the shares of Inverness stock we receive at closing of the Asset
Sale in order to obtain the cash necessary to satisfy our existing obligations, to fund our
operations through the dissolution process, and to preserve the value of the consideration received
in the Asset Sale. Our existing obligations include outstanding secured indebtedness, transaction
fees, and various employee costs, including certain change of control payments.
The Asset Purchase Agreement provides for Milano to acquire substantially all of our assets,
including our intellectual property rights, equipment, raw materials, inventory, contracts, the
stock of our German subsidiary and any cash in excess of $100,000. The assets excluded from the
Asset Sale include documents relating to our corporate existence and outstanding securities,
records we are required to retain, and contracts with employees not hired by Inverness, including
change of control agreements with management employees.
The Asset Purchase Agreement provides for Milano to assume substantially all of our
liabilities, but we will retain liabilities relating to (a) all our outstanding Secured Promissory
Notes (which we intend to pay in full following our sale of Inverness common stock as described
above); (b) all investment banker, legal and accounting fees incurred in connection with our
consummation of the Asset Sale; (c) all outstanding warrants issued by us for the purchase of
shares of our common stock; (d) all employee expenses incurred in connection with and employee
compensation earned prior to the closing of the Asset Sale; (e) all obligations owed to employees
who are not hired by Inverness, Milano or one of their affiliates following the closing of the
Asset Sale, including obligations under change of control agreements entered into with management
employees in the spring of 2006; and (f) income tax liabilities.
Prior to the closing, except as consented to by Inverness, we have agreed to continue our
operations in the ordinary course of business and, with limited exceptions, not to declare or pay
dividends; redeem securities; issue additional securities; amend our organizational documents;
increase the compensation due to directors or officers or materially amend or terminate any
employment, severance or similar agreements or benefit plans; adopt a shareholder rights plan;
acquire any other business; encumber our assets; incur further indebtedness; accelerate the payment
or vesting of any material compensation of benefit
21
arrangements; grant equity awards; make substantial capital expenditures; initiate, compromise
or settle any material litigation or arbitration proceeding; enter into or amend material
contracts; or make material changes in our accounting or tax elections.
We are also restricted from soliciting or entering into negotiations for or agreements related
to the sale or merger of the Company, except upon compliance with required notices to Inverness and
as required by applicable fiduciary duties. In addition, we will be required to pay Inverness a
break-up fee of $1.08 million under certain circumstances as further described in the Asset
Purchase Agreement.
There can be no assurance that the conditions to closing the Asset Sale will be satisfied or
that the Asset Sale will be completed on the terms set forth in the Asset Purchase Agreement or at
all. Following the closing of the Asset Sale and subject to the approval of our stockholders, we
intend to dissolve in compliance with the applicable provisions of the Delaware General Corporation
Law. As part of the dissolution process, we expect to distribute to our common stockholders the
available net proceeds, if any, beginning no earlier than the third quarter of 2008. The amount
ultimately available to be distributed to our stockholders will depend on a number of future
events, including, without limitation:
|
|
|
the timing of sales of Inverness common stock by us and the proceeds received by us in
connection with such sales;
|
|
|
|
|
our operating costs until the closing; and
|
|
|
|
|
the costs we will incur and be required to pay on and after the closing such as
transaction fees, obligations to employees, taxes, obligations related to liabilities not
assumed by Inverness, obligations related to funding the Company through dissolution and
any claims that may arise during the dissolution process.
|
We will only be able to distribute the remaining proceeds from the Asset Sale to our stockholders
after we satisfy all of our obligations to creditors and comply with applicable statutory
requirements. Though we expect to make an initial distribution to the holders of our common stock
in the third quarter of 2008, we do not expect a final distribution to be made until at least 2011.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q, our other reports and communications to our security
holders, as well as oral statements made by our officers or agents may contain forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. In particular, certain statements contained in Managements Discussion and Analysis
of Financial Condition and Results of Operations constitute forward-looking statements. Also,
statements that express or involve discussions with respect to predictions, expectations, beliefs,
plans, projections, objectives, assumptions or future events or performance or the outcome of
litigation (often, but not always, using words or phrases such as believes, expects or does
not expect, is expected, anticipates or does not anticipate or intends or stating that
certain actions, events or results may, could, would, might or will be taken or achieved)
are not statements of historical fact and are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements or developments in our business or industry, to differ
materially from the anticipated results, performance, achievements or developments expressed or
implied by such forward-looking statements. Such risks and uncertainties include the factors set
forth in Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2006 and in our other reports filed with the SEC. Readers
should not place undue reliance on any such forward-looking statements, which speak only as of the
date they are made. Forward-looking statements are based on our managements current plans,
estimates, opinions and projections, and we assume no obligation to update forward-looking
statements if assumptions regarding these plans, estimates, opinions or projections should change.
This discussion should be read in conjunction with the consolidated financial statements and
related Notes for the periods specified. Further reference should be made to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on March 27, 2007 (File
No. 001-12128).
Overview
On August 27, 2007, we entered into an Asset Purchase Agreement with Inverness and Milano, a
wholly owned subsidiary of Inverness, pursuant to which Milano has agreed to acquire substantially
all of our assets. If our stockholders approve the Asset Sale and the other conditions to closing
are satisfied, we expect the Asset Sale to close in the fourth quarter of 2007. Following the
closing of the Asset Sale and subject to the approval of our stockholders, we intend to dissolve in
compliance with the applicable provisions of the Delaware General Corporation Law.
In order to finance our operations until the closing of the Asset Sale, on August 30, 2007 we
sold our Series C Notes for aggregate consideration of $3.5 million (before expenses). All of the
principal, interest and premium on the Series C Notes are due and payable no later than December
13, 2007, the same date on which all unpaid principal, interest and premium on our
22
Secured Convertible Notes are due. At September 30, 2007, the outstanding principal balance
of our Secured Promissory Notes was $12.3 million.
At September 30, 2007, we had cash and cash equivalents of $2.8 million and negative working
capital of $10.8 million. Currently, the holders of more than 96% of our outstanding Secured
Convertible Notes agreed to defer receipt of further payments on the notes until December 13, 2007.
If the Asset Sale is not closed by December 13, 2007, we would need to seek an agreement from each
of the holders of our outstanding Secured Promissory Notes to extend the maturity dates of those
Secured Promissory Notes and/or to secure additional capital in order to continue operations. We
will, as we deem necessary or prudent and subject to the terms and conditions of the Asset Purchase
Agreement with Inverness and our various outstanding debt and equity agreements, continue to seek
to raise additional capital through various financing alternatives. A failure to adequately
finance the Company would have a material adverse impact on our ability to consummate the Asset
Sale and to operate as a going concern.
In order to preserve cash resources and to seek to avoid, or reduce, the need for any further
borrowing, we have selectively curtailed expenditures and decreased staff in regulatory affairs,
marketing and administration. We have also terminated most of our research and development staff
and are no longer pursuing further development or submission on any of our research and development
programs. Notwithstanding these efforts, if the closing of the Asset Sale is delayed beyond
December 2007, we may be required to obtain additional financing to fund our operations through the
closing date.
On September 26, 2007, we entered into a Termination Agreement with Sysmex Corporation that
provided for the immediate termination of the Exclusive License and Exclusive Supply Agreement
dated November 20, 2002 between Sysmex and us. As a result of this termination, we have no near
term prospect for securing additional revenue from commercialization of our NMP179
®
technology.
Our most important source of revenue and revenue growth continues to be our NMP22
®
BladderChek
®
Test, a point-of-care test product developed by our scientists based upon
our proprietary NMP technology. Our own sales forces, based in the U.S. and Germany, sell our
NMP22 BladderChek Test directly to physicians. Distributors sell our NMP22 BladderChek Test in
countries other than the U.S. and Germany. We also sell our NMP22 Test Kit, which is part of our
bladder cancer detection product line, directly and through distributors in the U.S. In Europe,
our German subsidiary directly sells both our NMP22 Test Kit and allergy and other diagnostic
products manufactured by others. The NMP22 Test Kit and the allergy and other diagnostic products
sold by our German subsidiary are less important sources of revenue for us than the NMP22
BladderChek Test.
AMEX, the exchange where our common stock is currently listed, maintains standards and
requirements for initial and continued listing of securities. In September 2006, we received
notice from AMEX that we were not in compliance with certain continued listing standards relative
to maintenance of stockholders equity and profitability. In October 2006, we submitted to AMEX a
plan of proposed action we believed would bring us into compliance with applicable listing
standards no later than March 21, 2008, and in December 2006, we received notice that AMEX had
accepted our plan. AMEX may initiate delisting procedures against us if we do not make progress
consistent with our plan during the plan period or if we are not in compliance with applicable
listing standards at the end of the plan period. A delisting of the shares of our common stock
would violate terms of our various financing documents, make it more difficult for us to raise
additional capital and could jeopardize the consummation of the Asset Sale.
Results of Operations
Quarter Ended September 30, 2006 (Q3 2006) Compared with Quarter Ended September 30, 2007 (Q3
2007)
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
|
Q3 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Product Sales (net of allowances):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMP22 BladderChek Test Sales
|
|
$
|
2,327,000
|
|
|
$
|
2,935,000
|
|
|
$
|
608,000
|
|
|
|
26
|
%
|
NMP22 Lab Test Kit Sales
|
|
|
265,000
|
|
|
|
196,000
|
|
|
|
(69,000
|
)
|
|
|
(26
|
%)
|
Other Product Sales
|
|
|
213,000
|
|
|
|
232,000
|
|
|
|
19,000
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales
|
|
|
2,805,000
|
|
|
|
3,363,000
|
|
|
|
558,000
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alliance and Collaboration Revenue
|
|
|
25,000
|
|
|
|
621,000
|
|
|
|
596,000
|
|
|
|
2,384
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
2,830,000
|
|
|
$
|
3,984,000
|
|
|
$
|
1,154,000
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The increase in revenue in the third quarter of 2007 compared to the third quarter of 2006
from sales of our NMP22 BladderChek Test is the result of $463,000 in increased sales and a
$145,000 favorable exchange rate impact. The $463,000 increase in NMP22 BladderChek Test sales
consists of a $308,000 increase in the volume of tests sold and a $155,000 increase in the average
revenue per test. The average revenue per test increased in 2007 over the same period in 2006 due
to more favorable customer mix. NMP22 BladderChek Test sales accounted for approximately 90% and
94% of sales in the NMP22 product line in the third quarters of 2006 and 2007, respectively. The
decrease in revenue from our NMP22 Lab Test Kit sales is the result of a $78,000 decrease,
principally the result of decreased volumes, offset by a $9,000 favorable exchange rate impact.
The increase in revenue from our non-NMP22 products (listed in the table above as Other
Product Sales) is mainly due to favorable exchange rates.
The increase in revenue from alliance and collaboration is due mainly to the termination of
the license and supply agreement for NMP179 technology with Sysmex Corporation effective September
26, 2007. As a result of the termination of this agreement, we recognized all remaining deferred
revenue relating to the license and supply agreement. This resulted in our recognizing
approximately $609,000 of revenue which consisted of the remaining amount of the license, which
previously was being recognized over the fourteen-year term of the related patents, as well as
remaining unamortized amounts related to payments for research and development services.
When we have sufficient history to estimate product returns for a distributor, we recognize
revenue when we ship our NMP22 BladderChek Tests to that distributor. In the third quarter of
2007, we sold approximately $90,000 of our NMP22 BladderChek Tests to distributors for which we had
sufficient history to estimate returns and approximately $44,000 to distributors for which we did
not have such history. Accordingly, shipments in the amount of $44,000 were recorded as deferred
revenue that we will recognize as revenue when the distributor reports to us that it no longer has
the product, when we determine the shelf life of the product has expired (each indicating that the
possibility of return is remote) or after we have ten quarters of experience with the distributor.
At December 31, 2006 and September 30, 2007, $91,000 and $103,000 remained in deferred product
revenue, respectively. See Critical Accounting Policies and Estimates for a description of our
revenue recognition policy.
During the third quarter of 2007, we determined that we had sufficient history to estimate
product returns for one additional distributor and therefore are now recognizing revenue when we
ship our NMP22 BladderChek Tests to this distributor. There was no deferred revenue recognized in
the third quarter of 2007 as a result of commencement of recognition of revenue from sales to of
this distributor upon shipment.
Deferred revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
September 30, 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Alliance and Collaboration Revenue
|
|
$
|
706,000
|
|
|
$
|
85,000
|
|
|
$
|
(621,000
|
)
|
|
|
(88
|
%)
|
Deferred Product Revenue
|
|
|
91,000
|
|
|
|
103,000
|
|
|
|
12,000
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
797,000
|
|
|
$
|
188,000
|
|
|
$
|
(609,000
|
)
|
|
|
(76
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred product revenue balance increased from the fourth quarter of 2006 to the third
quarter of 2007 because we shipped more NMP22 BladderChek Tests to distributors for which we do not
have sufficient history to estimate product returns than these distributors shipped to end user
customers. Unless we change distributors or add significant new distributors, we expect our
deferred product revenue will decrease in the future.
The deferred revenue related to alliance and collaboration decreased from the fourth quarter
of 2006 to the third quarter of 2007 mainly due to the termination of the license and supply
agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result
the termination of this agreement, we recognized all remaining deferred revenue relating to the
license and supply agreement.
Cost of Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
|
Q3 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Product Sales
|
|
$
|
2,805,000
|
|
|
$
|
3,363,000
|
|
|
$
|
558,000
|
|
|
|
20
|
%
|
Cost of Product Sales
|
|
|
741,000
|
|
|
|
829,000
|
|
|
|
88,000
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit on Product Sales
|
|
$
|
2,064,000
|
|
|
$
|
2,534,000
|
|
|
$
|
470,000
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin on
Product Sales
|
|
|
74
|
%
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
Cost of Product Sales as a %
of Product Sales
|
|
|
26
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
24
Cost of product sales includes (a) payroll-related expenses related to employees involved in
the production of our products, (b) product materials, (c) rent and related expenses allocated to
employees involved in the production of our products, (d) supplies, (e) depreciation of fixed
assets used in production and (f) royalties paid to third parties. Gross profit on product sales
is calculated by deducting the cost of product sales from product sales. The decrease in cost of
product sales on a percentage basis and the increase in our gross profit margin on product sales is
largely the result of a decrease in the amount of royalties paid to Massachusetts Institute of
Technology (MIT) on sales of our NMP22 BladderChek Tests and our NMP22 Lab Test Kits as the
majority of the patents licensed to us by MIT expired in the fourth quarter of 2006.
Research & Development and Clinical & Regulatory Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
Research &
Development and
Clinical &
Regulatory Expenses
|
|
$
|
700,000
|
|
|
$
|
507,000
|
|
|
$
|
(193,000
|
)
|
|
|
(28
|
%)
|
Research & development and clinical & regulatory expenses include (a) the salaries and related
overhead of our research and clinical personnel, (b) laboratory supplies, (c) payments to third
parties and sites to help us execute clinical trials, (d) depreciation of research related
equipment, (e) legal expenses related to filing and prosecuting patents, (f) other direct expenses
and (g) an allocation of our occupancy and related expenses based on the square footage occupied by
our research & development staff, their laboratories and clinical & regulatory staff. Research &
development and clinical & regulatory expenses decreased in the third quarter of 2007 compared to
the third quarter of 2006 primarily due to a $130,000 decrease in payroll costs, a $24,000 decrease
in supply costs and a $15,000 decrease in consultant costs.
Selling,
General and Administrative Expenses
(SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
SG&A
|
|
$
|
3,529,000
|
|
|
$
|
4,647,000
|
|
|
$
|
1,118,000
|
|
|
|
32
|
%
|
SG&A increased in the third quarter of 2007 compared to the third quarter of 2006 primarily
due to a $385,000 increase in legal costs incurred in connection with consideration and pursuit of
various transactions including the Asset Sale and the Financing, a $360,000 increase in investment
banker costs incurred in connection with our exploration of strategic options, a $104,000
unfavorable currency exchange rate impact on non-US SG&A, a $100,000 increase in payroll costs
resulting from increased headcount, mainly to support direct sales efforts, a $70,000 increase in
sales-related marketing expense, a $56,000 increase in accounting-related professional fees, a
$45,000 increase in recruiting and relocation costs and a $39,000 increase in management
information system related costs, partially offset by a $36,000 decrease in temporary help costs.
Operating Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
Operating Loss
|
|
$
|
2,140,000
|
|
|
$
|
1,999,000
|
|
|
$
|
(141,000
|
)
|
|
|
(7
|
%)
|
The operating loss in the third quarter of 2007 decreased as compared to the same period in
2006 primarily due to the decrease in research & development and clinical & regulatory expenses as
well as the increase in total revenue discussed above.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
Interest Income
|
|
$
|
28,000
|
|
|
$
|
9,000
|
|
|
$
|
(19,000
|
)
|
|
|
(68
|
%)
|
25
Interest income decreased in the third quarter of 2007 compared to the third quarter of 2006
due to a decrease in the average daily cash balances, partially offset by higher interest rates
during the third quarter of 2007.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
|
Q3 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Interest Related to Secured Convertible Notes and Secured
Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Debt
|
|
$
|
236,000
|
|
|
$
|
1,078,000
|
|
|
$
|
842,000
|
|
|
|
357
|
%
|
Non-Cash Charges to Interest Expense
|
|
|
575,000
|
|
|
|
1,755,000
|
|
|
|
1,180,000
|
|
|
|
205
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
811,000
|
|
|
$
|
2,833,000
|
|
|
$
|
2,022,000
|
|
|
|
249
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Related to Other Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid in Cash
|
|
$
|
5,000
|
|
|
$
|
6,000
|
|
|
$
|
1,000
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
$
|
816,000
|
|
|
$
|
2,839,000
|
|
|
$
|
2,023,000
|
|
|
|
248
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt consists primarily of interest accrued or paid in the quarter related to our
Secured Promissory Notes. For the third quarter of 2006, interest on debt was attributable to our
2006 Secured Convertible Notes. In the third quarter of 2007, interest on debt was attributable to
the 2006 Secured Convertible Notes, the 2007 Secured Convertible Notes and the Series C Notes,
resulting in a larger outstanding debt balance.
In the third quarter of 2007, we issued common stock in payment of approximately $13,000 of
interest on the 2006 Secured Convertible Notes and we made a cash payment of approximately $10,000
in respect of interest on the 2007 Secured Convertible Notes. In the third quarter of 2007,
holders of our Secured Convertible Notes elected to defer approximately $107,000 of interest
payments due in July 2007 on the 2006 Secured Convertible Notes and approximately $398,000 of
interest payments due on the 2007 Secured Convertible Notes until the earlier of (i) a sale of
substantially all our assets or a merger or (ii) the scheduled maturity date of December 13, 2007.
The interest on debt and non-cash charges increased over the third quarter of 2006 primarily
due to the increase in interest on debt charges and non-cash interest charges related to the
Secured Convertible Notes and the Series C Notes, as further described below.
Series C Notes
In August 2007, we sold the Series C Notes and as a result incurred the obligation to pay a
premium of 29% of the principal at the time of repayment, or approximately $1,015,000. As of
September 30, 2007, approximately $256,000 of the $1,015,000 have been accreted and recorded as
interest expense and the remaining $759,000 is scheduled to be accreted to interest expense using
the effective interest method over the life of the Series C Notes.
The following table demonstrates the accounting for the Series C Notes from the date of
issuance, August 30, 2007, to September 30, 2007;
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value Series C Notes
|
|
$
|
3,500,000
|
|
2007 Accretion of Premium
|
|
|
256,000
|
|
Payments in Cash
|
|
|
|
|
|
|
|
|
Carrying Value of Series C Notes at 9/30/07
|
|
$
|
3,756,000
|
|
|
|
|
|
2007 Secured Convertible Notes
In January 2007, we sold the 2007 Secured Convertible Notes and recorded approximately
$3,253,000 of related non-cash charges which are being recorded in our statement of operations
through December 2007, the life of the obligations. As of September 30, 2007, approximately
$2,529,000 of the $3,253,000 of non-cash charges and deferred financing costs have been amortized
and recorded as interest expense and the remaining $724,000 is scheduled to be amortized using the
effective interest rate method over the remaining quarter through the final payment due date in
December 2007.
26
Non-cash charges to interest expense in the third quarter of 2007 related to the 2007 Secured
Convertible Notes consisted of:
|
|
|
$102,000 of amortized deferred financing costs, which reduced the original
$395,000 balance of deferred financing costs to $88,000 at September 30, 2007; and
|
|
|
|
$735,000 of amortized debt discount, which reduced the $2,857,000 of debt
discount to $636,000 at September 30, 2007.
|
The following table demonstrates the accounting for the 2007 Secured Convertible Notes and
related discounts from the date of issuance, January 22, 2007, to September 30, 2007;
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value 2007 Secured Convertible Notes
|
|
$
|
4,365,000
|
|
Discounts Recorded in 2007
|
|
|
(2,857,000
|
)
|
2007 Amortization of Discounts
|
|
|
2,221,000
|
|
2007 Accretion of Premium
|
|
|
265,000
|
|
Payments in Stock
|
|
|
|
|
Payments in Cash
|
|
|
(150,000
|
)
|
|
|
|
|
Carrying Value of 2007 Secured Convertible Notes at 9/30/07
|
|
$
|
3,844,000
|
|
|
|
|
|
2006 Secured Convertible Notes
In January 2006, we sold our 2006 Secured Convertible Notes and recorded approximately
$6,001,000 of related non-cash charges which are being recorded in our statement of operations
through December 2007. As a result of the issuance of the 2007 Secured Convertible Notes, we
recorded an additional beneficial conversion feature of approximately $208,000 on the 2006 Secured
Convertible Notes in the first quarter of 2007. These additional non-cash charges are being
recorded in our statement of operations through December 2007. As of September 30, 2007,
approximately $5,422,000 of the $6,209,000 non-cash charges and deferred financing costs have been
amortized and recorded as interest expense and the remaining $787,000 will be amortized using the
effective interest rate method over the remaining quarters through December 2007. On January 22,
2007 the scheduled maturity date for the 2006 Secured Convertible Notes was shortened to December
13, 2007.
Non-cash charges to interest expense in the third quarter of 2007 related to the 2006 Secured
Convertible Notes consisted of:
|
|
|
$133,000 of amortized deferred financing costs, which contributed to the
reduction of the original $912,000 of deferred financing costs to $116,000 at
September 30, 2007;
|
|
|
|
$774,000 of amortized debt discount, which contributed to the reduction of the
$5,296,000 of debt discount to $670,000 at September 30, 2007; and
|
|
|
|
$10,000 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.
|
The following table demonstrates the accounting for the 2006 Secured Convertible Notes and
related discounts from the date of issuance, January 13, 2006, through September 30, 2007:
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value of Debt
|
|
$
|
6,998,000
|
|
Discounts Recorded in 2006
|
|
|
(5,089,000
|
)
|
2006 Amortization of Discounts
|
|
|
2,338,000
|
|
Payments in Stock
|
|
|
(880,000
|
)
|
|
|
|
|
Carrying Value of Debt at 12/31/06
|
|
$
|
3,367,000
|
|
|
|
|
|
|
|
|
|
|
Discounts Recorded in 2007
|
|
|
(208,000
|
)
|
2007 Amortization of Discounts
|
|
|
2,287,000
|
|
2007 Accretion of Premium
|
|
|
174,000
|
|
Payment in Stock
|
|
|
(1,458,000
|
)
|
Payment in Cash
|
|
|
(55,000
|
)
|
|
|
|
|
Carrying Value of Debt at 9/30/07
|
|
$
|
4,107,000
|
|
|
|
|
|
27
Mark-to-Market Adjustment From Registration Rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
Mark-To-Market
Adjustment From
Registration Rights
|
|
$
|
11,000
|
|
|
$
|
|
|
|
$
|
(11,000
|
)
|
|
|
(100
|
%)
|
Mark-to-market adjustment from registration rights represents the change in the estimated fair
value of the registration rights liability associated with our sale of the 2006 Secured Convertible
Notes.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2006
|
|
Q3 2007
|
|
$ Change
|
|
% Change
|
Net Loss
|
|
$
|
2,939,000
|
|
|
$
|
4,829,000
|
|
|
$
|
1,890,000
|
|
|
|
64
|
%
|
Net loss increased in the third quarter of 2007 as compared to the same period in 2006
primarily due to increased SG&A expenses as well as increased non-cash interest charges related to
the Secured Convertible Notes, partially offset by the increase in total revenues, including the
deferred revenue recognized as a result of the termination of the Sysmex agreement, the increase in
gross profit margins on product sales and the decrease in research & development and clinical &
regulatory expenses.
Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
|
|
|
|
|
|
30, 2006
|
|
|
30, 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Product Sales (net of allowances):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMP22 BladderChek Test Sales
|
|
$
|
6,944,000
|
|
|
$
|
8,409,000
|
|
|
$
|
1,465,000
|
|
|
|
21
|
%
|
NMP22 Lab Test Kit Sales
|
|
|
804,000
|
|
|
|
822,000
|
|
|
|
18,000
|
|
|
|
2
|
%
|
Other Product Sales
|
|
|
736,000
|
|
|
|
780,000
|
|
|
|
44,000
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales
|
|
|
8,484,000
|
|
|
|
10,011,000
|
|
|
|
1,527,000
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alliance and Collaboration Revenue
|
|
|
78,000
|
|
|
|
687,000
|
|
|
|
609,000
|
|
|
|
781
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,562,000
|
|
|
$
|
10,698,000
|
|
|
$
|
2,136,000
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenue for the nine month period ended September 30, 2007 compared to the
nine month period ended September 30, 2006 from sales of our NMP22 BladderChek Test is the result
of $1,052,000 in increased sales and a $413,000 favorable exchange rate impact. The $1,052,000
increase in NMP22 BladderChek Test sales consists of $143,000 related to an increase in the average
revenue per test and a $909,000 increase in the volume of tests sold. The average revenue per test
increased in 2007 over the same period in 2006 due to more favorable customer mix. The increase in
volume is due to an increase of $1,142,000 in markets where we sell directly offset by a $233,000
decrease in markets where we sell to distributors. This $233,000 decrease arises in large part
because in the first nine months of 2006, we recognized $172,000 of revenue from sales to
distributors that had previously been in deferred revenue, compared to $0 that we recognized in the
first nine months of 2007 from such distributors. NMP22 BladderChek Test sales accounted for
approximately 90% and 91% of sales in the NMP22 product line for the nine months ended September
30, 2006 and 2007, respectively. The increase in revenue from our NMP22 Lab Test Kit sales is the
result of a $28,000 favorable exchange rate impact, offset by a $10,000 decrease in sales.
The increase in revenue from our non-NMP22 products (listed in the table above as Other
Product Sales) is mainly due to favorable exchange rates.
28
The increase in revenue from alliance and collaboration is due mainly to the termination of
the license and supply agreement for NMP179 technology with Sysmex Corporation effective September
26, 2007. As a result of the termination of this agreement, we recognized all remaining deferred
revenue relating to the license and supply agreement. This resulted in our recognizing
approximately $609,000 of revenue which consisted of the remaining amount of the license, which
previously was being recognized over the fourteen-year term of the related patents, as well as
remaining unamortized amounts related to payments for research and development services.
When we have sufficient history to estimate product returns for a distributor, we recognize
revenue when we ship our NMP22 BladderChek Tests to that distributor. During the first nine months
of 2007, we sold approximately $242,000 of our NMP22 BladderChek Tests to distributors for which we
had sufficient history to estimate returns and approximately $83,000 to distributors for which we
did not have such history. Accordingly, $83,000 of shipments were recorded as deferred revenue and
will be recognized as revenue when the distributor reports to us that it no longer has the product,
when we determine the shelf life of the product has expired (each indicating that the possibility
of return is remote) or after we have ten quarters of experience with an individual distributor.
At December 31, 2006 and September 30, 2007, $91,000 and $103,000 remained in deferred product
revenue, respectively. See Critical Accounting Policies and Estimates for a description of our
revenue recognition policy.
During the first nine months of 2006, we determined that we had sufficient history to estimate
product returns for three additional distributors and therefore are now recognizing revenue when we
ship our NMP22 BladderChek Tests to these distributors. We also recognized all deferred revenue
relating to our NMP22 BladderChek Test shipments to these distributors in the nine months ended
September 30, 2006. This has resulted in our recognizing $172,000 of our NMP22 BladderChek Test
shipments to distributors that previously would have been in deferred revenue.
Deferred revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
September 30, 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Alliance and Collaboration Revenue
|
|
$
|
706,000
|
|
|
$
|
85,000
|
|
|
$
|
(621,000
|
)
|
|
|
(88
|
%)
|
Deferred Product Revenue
|
|
|
91,000
|
|
|
|
103,000
|
|
|
|
12,000
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
797,000
|
|
|
$
|
188,000
|
|
|
$
|
(609,000
|
)
|
|
|
(76
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred product revenue balance increased from the fourth quarter of 2006 to the third
quarter of 2007 because we shipped more NMP22 BladderChek Tests to distributors for which we do not
have sufficient history to estimate product returns than these distributors shipped to end user
customers. Unless we change distributors or add significant new distributors, we expect our
deferred product revenue will decrease in the future.
The deferred revenue related to alliance and collaboration decreased from the fourth quarter
of 2006 to the third quarter of 2007 mainly due to the termination of the license and supply
agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result
the termination of this agreement, we recognized all remaining deferred revenue relating to the
license and supply agreement.
Cost of Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
|
|
|
|
|
|
30, 2006
|
|
|
30, 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Product Sales
|
|
$
|
8,484,000
|
|
|
$
|
10,011,000
|
|
|
$
|
1,527,000
|
|
|
|
18
|
%
|
Cost of Product Sales
|
|
|
2,280,000
|
|
|
|
2,374,000
|
|
|
|
94,000
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit on Product Sales
|
|
$
|
6,204,000
|
|
|
$
|
7,637,000
|
|
|
$
|
1,433,000
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
Margin on Product Sales
|
|
|
73
|
%
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
Cost of
Product Sales as a % of Product Sales
|
|
|
27
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
Cost of product sales includes (a) payroll-related expenses related to employees involved in
the production of our products, (b) product materials, (c) rent and related expenses allocated to
employees involved in the production of our products, (d)
29
supplies, (e) depreciation of fixed assets used in production and (f) royalties paid to third
parties. Gross profit on product sales is calculated by deducting the cost of product sales from
product sales. The decrease in cost of product sales on a percentage basis and the increase in our
gross profit margin on product sales is largely the result of a decrease in the amount of royalties
paid to MIT on sales of our NMP22 BladderChek Tests and our NMP22 Lab Test Kits as the majority of
the patents licensed to us by MIT expired during the fourth quarter of 2006.
Research & Development and Clinical & Regulatory Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
Research &
Development and
Clinical &
Regulatory Expenses
|
|
$
|
2,257,000
|
|
|
$
|
1,740,000
|
|
|
$
|
(517,000
|
)
|
|
|
(23
|
%)
|
Research & development and clinical & regulatory expenses include (a) the salaries and related
overhead of our research and clinical personnel, (b) laboratory supplies, (c) payments to third
parties and sites to help us execute clinical trials, (d) depreciation of research related
equipment, (e) legal expenses related to filing and prosecuting patents, (f) other direct expenses
and (g) an allocation of our occupancy and related expenses based on the square footage occupied by
our research & development staff, their laboratories and clinical & regulatory staff. Research &
development and clinical & regulatory expenses decreased in the nine month period ended September
30, 2007 compared to the nine month period ended September 30, 2006 primarily due to a $317,000
decrease in payroll costs, a $101,000 decrease in supply costs, and a $56,000 decrease in
consultant costs.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
SG&A
|
|
$
|
10,688,000
|
|
|
$
|
12,838,000
|
|
|
$
|
2,150,000
|
|
|
|
20
|
%
|
SG&A increased in the nine month period ended September 30, 2007 compared to nine month period
ended September 30, 2006 primarily due to a $647,000 increase in legal costs incurred in connection
with consideration and pursuit of various transactions including the Asset Sale and the Financing,
a $492,000 increase in investment banker costs incurred in connection with our exploration of
strategic options, a $485,000 increase in payroll costs resulting from increased headcount, mainly
to support direct sales efforts, a $297,000 unfavorable currency exchange rate impact on non-US
SG&A, a $141,000 increase in management information system related costs, a $90,000 increase in
sales-related marketing expense and a $72,000 increase in accounting-related professional fees,
offset by a $135,000 decrease in corporate communication costs.
Operating Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
Operating Loss
|
|
$
|
6,643,000
|
|
|
$
|
6,255,000
|
|
|
$
|
(388,000
|
)
|
|
|
(6
|
%)
|
The operating loss for the nine month period ended September 30, 2007 decreased as compared to
the same period in 2006 primarily due to the decrease in research & development and clinical &
regulatory expenses as well as the increase in total revenue discussed above.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
Interest Income
|
|
$
|
120,000
|
|
|
$
|
49,000
|
|
|
$
|
(71,000
|
)
|
|
|
(59
|
%)
|
30
Interest income decreased in the nine month period ended September 30, 2007 compared to the
nine month period ended September 30, 2006 due to a decrease in the average daily cash balances,
partially offset by higher interest rates during the first nine months of 2007.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
|
|
|
|
|
|
30, 2006
|
|
|
30, 2007
|
|
|
$ Change
|
|
|
% Change
|
|
Interest Related to Convertible Debentures, Secured
Convertible Notes and Secured Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Debt
|
|
$
|
707,000
|
|
|
$
|
1,754,000
|
|
|
$
|
1,047,000
|
|
|
|
148
|
%
|
Non-Cash Charges to Interest Expense
|
|
|
2,310,000
|
|
|
|
5,581,000
|
|
|
|
3,271,000
|
|
|
|
142
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,017,000
|
|
|
$
|
7,335,000
|
|
|
$
|
4,318,000
|
|
|
|
143
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Related to Other Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid in Cash
|
|
$
|
10,000
|
|
|
$
|
13,000
|
|
|
$
|
3,000
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
$
|
3,027,000
|
|
|
$
|
7,348,000
|
|
|
$
|
4,321,000
|
|
|
|
143
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt consists primarily of interest accrued or paid in the nine month periods
ended September 30, 2006 and 2007 related to our Secured Promissory Notes. For the nine month
period ended September 30, 2006, interest on debt was attributable primarily to our 2006 Secured
Convertible Notes. For the nine month period ended September 30, 2007, interest on debt was
attributable to the 2006 Secured Convertible Notes, the 2007 Secured Convertible Notes and the
Series C Notes, which resulted in a larger outstanding debt balance.
In the first quarter of 2007, we issued shares of our common stock in payment of approximately
$925,000 of interest on the 2006 Secured Convertible Notes, of which $890,000 had been accrued
through December 31, 2006. In the second and third quarters of 2007, we issued common stock in
payment of approximately $259,000 and $13,000, respectively, of interest on the 2006 Secured
Convertible Notes. In the second and third quarters of 2007, we paid approximately $18,000 and
$10,000, respectively, in cash in payment of interest on the 2007 Secured Convertible Notes. In
the third quarter of 2007, holders of our 2006 Secured Convertible Notes and our 2007 Secured
Convertible Notes elected to defer approximately $107,000 of interest payments due in July 2007 on
the 2006 Secured Convertible Notes and approximately $398,000 of interest payments due in June and
September 2007 until the earlier of (i) a sale of substantially all our assets or a merger or (ii)
the scheduled maturity date of December 13, 2007.
The interest on debt and non-cash charges increased over the nine month period ended September
30, 2006 primarily due to the increase in interest on debt charges and non-cash interest charges
related to the Secured Convertible Notes and the Secured Promissory Notes, as further described
below.
Series C Notes
In August 2007, we sold the Series C Notes and as a result incurred the obligation to pay a
premium of 29% of the principal at the time of repayment, or approximately $1,015,000. As of
September 30, 2007, approximately $256,000 of the $1,015,000 have been accreted and recorded as
interest expense and the remaining $759,000 is scheduled to be accreted to interest expense using
the effective interest method over the life of the Series C Notes.
The following table demonstrates the accounting for the Series C Notes from the date of
issuance, August 30, 2007, to September 30, 2007:
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value Series C Notes
|
|
$
|
3,500,000
|
|
2007 Accretion of Premium
|
|
|
256,000
|
|
Payments in Cash
|
|
|
|
|
|
|
|
|
Carrying Value of Series C Notes at 9/30/07
|
|
$
|
3,756,000
|
|
|
|
|
|
2007 Secured Convertible Notes
In January 2007, we sold our 2007 Secured Convertible Notes and recorded approximately
$3,253,000 of related non-cash charges which are being recorded in our statement of operations
through December 2007, the life of the debt. As of September
31
30, 2007, approximately $2,529,000 of the $3,253,000 of non-cash charges and deferred
financing costs have been amortized and recorded as interest expense and the remaining $724,000 is
scheduled to be amortized using the effective interest rate method over the remaining quarters
through the final payment due date in December 2007.
Non-cash charges to interest expense for the nine months ended September 30, 2007 related to
the 2007 Secured Convertible Notes consisted of:
|
|
|
$307,000 of amortized deferred financing costs, which reduced the original
$395,000 balance of deferred financing costs to $88,000 at September 30, 2007; and
|
|
|
|
|
$2,221,000 of amortized debt discount, which reduced the $2,857,000 of debt
discount to $636,000 at September 30, 2007.
|
The following table demonstrates the accounting for the 2007 Secured Convertible Notes and
related discounts from the date of issuance, January 22, 2007, through September 30, 2007:
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value 2007 Secured Convertible Notes
|
|
$
|
4,365,000
|
|
Discounts Recorded in 2007
|
|
|
(2,857,000
|
)
|
2007 Amortization of Discounts
|
|
|
2,221,000
|
|
2007 Accretion of Premium
|
|
|
265,000
|
|
Payments in Stock
|
|
|
|
|
Payments in Cash
|
|
|
(150,000
|
)
|
|
|
|
|
Carrying Value of 2007 Secured Convertible Notes at September 30, 2007
|
|
$
|
3,844,000
|
|
|
|
|
|
2006 Secured Convertible Notes
In January 2006, we sold our 2006 Secured Convertible Notes and recorded approximately
$6,001,000 of related non-cash charges which are being recorded in our statement of operations
through December 2007. As a result of the issuance of the 2007 Secured Convertible Notes, we
recorded an additional beneficial conversion feature of approximately $208,000 on the 2006 Secured
Convertible Notes in the first quarter of 2007. These additional non-cash charges are being
recorded in our statement of operations through December 2007. As of September 30, 2007,
approximately $5,422,000 of the $6,209,000 non-cash charges and deferred financing costs have been
amortized and recorded as interest expense and the remaining $787,000 will be amortized using the
effective interest rate method over the remaining quarters through December 2007. On January 22,
2007, the scheduled maturity date for the 2006 Secured Convertible Notes was shortened to December
13, 2007.
Non-cash charges to interest expense in the nine months ended September 30, 2007 related to
the 2006 Secured Convertible Notes consisted of:
|
|
|
$378,000 of amortized deferred financing costs, which contributed to the
reduction of the original $912,000 of deferred financing costs to $116,000 at
September 30, 2007;
|
|
|
|
|
$2,287,000 of amortized debt discount, which contributed to the reduction of the
$5,296,000 of debt discount to $670,000 at September 30, 2007; and
|
|
|
|
|
$388,000 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.
|
The following table demonstrates the accounting for the 2006 Secured Convertible Notes and
related discounts from the date of issuance, January 13, 2006, through September 30, 2007:
|
|
|
|
|
|
|
Value of Notes
|
|
Principal Value of Debt
|
|
$
|
6,998,000
|
|
Discounts Recorded in 2006
|
|
|
(5,089,000
|
)
|
2006 Amortization of Discounts
|
|
|
2,338,000
|
|
Interest and Principal Payments in Stock
|
|
|
(880,000
|
)
|
|
|
|
|
Carrying Value of Debt at December 31, 2006
|
|
$
|
3,367,000
|
|
|
|
|
|
32
|
|
|
|
|
|
|
Value of Notes
|
|
Discounts Recorded in 2007
|
|
|
(208,000
|
)
|
2007 Amortization of Discounts
|
|
|
2,287,000
|
|
2007 Accretion of Premium
|
|
|
174,000
|
|
Payment in Stock
|
|
|
(1,458,000
|
)
|
Payment in Cash
|
|
|
(55,000
|
)
|
|
|
|
|
Carrying Value of Debt at September 30, 2007
|
|
$
|
4,107,000
|
|
|
|
|
|
March 2003 Convertible Debentures
In March 2003, we completed a $5.0 million private placement of the March 2003 Convertible
Debentures and, subsequent to issuance, recorded an additional $4.6 million of non-cash charges
related to the Convertible Debentures which were charged to our income statement through March 31,
2006. All of the non-cash charges and deferred financing costs have been amortized and charged as
interest expense as this debenture was fully repaid as of March 31, 2006.
Non-cash charges to interest expense for 2006 related to the March 2003 Convertible Debentures
consisted of:
|
|
|
$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.
|
The following table demonstrates the accounting for the March 2003 Convertible Debentures and
related discounts during 2003, 2004, 2005 and 2006 and the resulting balance at March 31, 2006, at
which point the March 2003 Convertible Debentures had been fully repaid:
|
|
|
|
|
|
|
Value of
|
|
|
|
Debentures
|
|
Principal Value of Debenture
|
|
$
|
5,000,000
|
|
Discounts Recorded in 2003
|
|
|
(2,777,000
|
)
|
2003 Amortization of Discounts
|
|
|
644,000
|
|
|
|
|
|
Carrying Value of Debenture at December 31, 2003
|
|
$
|
2,867,000
|
|
|
|
|
|
|
|
|
|
|
Discounts Recorded in 2004
|
|
|
(1,339,000
|
)
|
2004 Amortization of Discounts
|
|
|
2,150,000
|
|
Payment in Stock
|
|
|
(1,923,000
|
)
|
|
|
|
|
Carrying Value of Debenture at December 31, 2004
|
|
$
|
1,755,000
|
|
|
|
|
|
|
|
|
|
|
Discounts Recorded in 2005
|
|
|
(442,000
|
)
|
2005 Amortization of Discounts
|
|
|
1,630,000
|
|
Payment in Stock
|
|
|
(2,308,000
|
)
|
|
|
|
|
Carrying Value of Debenture at December 31, 2005
|
|
$
|
635,000
|
|
|
|
|
|
|
|
|
|
|
2006 Amortization of Discounts
|
|
|
134,000
|
|
Payment in Stock
|
|
|
(769,000
|
)
|
|
|
|
|
Carrying
Value of Debenture at March 31, 2006
|
|
$
|
|
|
|
|
|
|
33
Mark-to-Market Adjustment From Registration Rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
Mark-To-Market Adjustment From
Registration Rights
|
|
$
|
49,000
|
|
|
$
|
|
|
|
$
|
(49,000
|
)
|
|
|
(100
|
%)
|
Mark-to-market adjustment from registration rights represents the change in the estimated fair
value of the registration rights liability associated with our sale of the 2006 Secured Convertible
Notes.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
|
|
|
Ended September
|
|
Ended September
|
|
|
|
|
|
|
30, 2006
|
|
30, 2007
|
|
$ Change
|
|
% Change
|
Net Loss
|
|
$
|
9,599,000
|
|
|
$
|
13,553,000
|
|
|
$
|
3,954,000
|
|
|
|
41
|
%
|
Net loss increased for the nine month period ended September 30, 2007 as compared to the same
period in 2006 primarily due to increased SG&A expenses as well as increased non-cash interest
charges related to the Secured Convertible Notes, partially offset by the increase in total
revenues, including the deferred revenue recognized as a result of the termination of the Sysmex
agreement, the increase in gross profit margins on product sales and the decrease in research &
development and clinical & regulatory expenses.
Research and Development Programs
Our primary research focus has been on the identification of proteins in the body that are
associated with or created by cancerous processes and which, when measured, can provide useful
medical information to physicians. Since 2004, we focused our development efforts on our breast
cancer program. During the first nine months of 2007, we reduced the resources devoted to this
program, and have now terminated most of our research and development staff and are no longer
pursuing further development or submission on any of our research and development programs.
Liquidity and Capital Resources
Our operating activities used cash in the nine month periods ended September 30, 2006 and 2007
primarily to fund our net losses excluding non-cash charges. The non-cash charges comprise
primarily depreciation and amortization expenses, and amortization of debt discounts and deferred
charges related to our Secured Convertible Notes.
Summary Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2007
|
|
Net Loss
|
|
$
|
(9,599,000
|
)
|
|
$
|
(13,553,000
|
)
|
Non-cash Charges
|
|
|
3,504,000
|
|
|
|
8,766,000
|
|
Changes in Assets and Liabilities
|
|
|
(39,000
|
)
|
|
|
(883,000
|
)
|
|
|
|
|
|
|
|
Net Operating Uses
|
|
|
(6,134,000
|
)
|
|
|
(5,670,000
|
)
|
Net Investment Uses
|
|
|
(89,000
|
)
|
|
|
(62,000
|
)
|
Net Financing Sources
|
|
|
6,203,000
|
|
|
|
7,040,000
|
|
Foreign exchange effect
|
|
|
16,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
(4,000
|
)
|
|
$
|
1,336,000
|
|
|
|
|
|
|
|
|
34
We expect that the Days Sales Outstanding (DSO) (which includes only accounts receivable
from physicians to whom we have sold the NMP22 BladderChek Test) is likely to be higher in the
future than the 37 days reported at September 30, 2007. Our DSO calculation at September 30, 2006
was 36 days. We expect U.S. direct-to-physician revenues as a percentage of total revenues to
increase and, since our DSO on U.S. direct-to-physician sales was 52 days, we expect our average
DSO to increase as U.S. sales become a larger percent of our total.
We do not include in our DSO calculation any amount due from or any shipments to distributors
of our NMP22 BladderChek Test because historically, we have not recognized revenue upon shipment to
distributors because we lacked sufficient history with these distributors to estimate returns. Unpaid amounts due from
distributors are included in accounts receivable on our balance sheets even if we have not recorded
revenue from them. We also exclude from our DSO calculation any accounts receivable resulting from
a non-revenue source, such as receivables due from a supplier. We did not have any non-revenue
source transactions in accounts receivable for the three month periods ending September 30, 2006
and 2007.
When we include amounts due from and any shipments to distributors of our NMP22 BladderChek
Test or other products, our DSO at September 30, 2007 was 41 days compared to 40 days at September
30, 2006.
During the quarter ended September 30, 2007, the holders of more than 93% of the outstanding
principal of our Secured Convertible Notes agreed to defer receipt of payments of principal and
interest due on the Secured Convertible Notes until the earlier of December 13, 2007 or a change of
control of the Company, such as the contemplated Asset Sale. During October 2007, one additional
holder also agreed to defer receipt of payments on this basis. As a result, through November 2007,
we are paying less than $100,000 per month on our outstanding Secured Promissory Notes as all other
payments have been deferred.
Based on our negative working capital at September 30, 2007 of $10.8 million, our current cash
utilization forecast and assuming that the holders of our outstanding Secured Promissory Notes due
December 13, 2007 consent to a deferral of payments until after the consummation of the sale of
substantially all of our assets to Milano, we expect to have sufficient capital to continue
operations through the closing of the Asset Sale, so long as the Asset Sale is closed by December
13, 2007. If the Asset Sale is not closed by the December 13, 2007, or if the holders of any
significant portion of our outstanding Secured Promissory Notes do not agree to defer payments
beyond the December 13, 2007 maturity date until after the closing of the Asset Sale, we would need
to secure additional funds in order to continue operations. We will, as we deem necessary or
prudent and subject to the terms and conditions of the Asset Purchase Agreement with Inverness and
our various outstanding debt and equity agreements, continue to seek to raise additional capital
through various financing alternatives, including equity or debt financings, issuances of
securities convertible into equity and corporate partnering arrangements. However, we have had
great difficulty obtaining additional financing over the past year and may be unable to raise
further capital.
Due to the issuance of our Series C Notes, we have substantially increased our indebtedness to
approximately $12.4 million as of September 30, 2007. As shown in the following table, the Secured
Promissory Notes comprise over 99% of our indebtedness at that date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Conversions and
|
|
|
|
|
|
|
Issuance
|
|
|
Repayments
|
|
|
Outstanding
|
|
2006 Secured Convertible Notes
|
|
$
|
6,998,000
|
|
|
$
|
2,394,000
|
|
|
$
|
4,604,000
|
|
2007 Secured Convertible Notes
|
|
$
|
4,365,000
|
|
|
|
150,000
|
|
|
|
4,215,000
|
|
Series C Notes
|
|
$
|
3,500,000
|
|
|
|
|
|
|
|
3,500,000
|
|
Other indebtedness
|
|
|
|
|
|
|
|
|
|
|
31,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturity date for all of our Secured Promissory Notes is no later than December 13, 2007.
On December 13, 2007, assuming no interim optional conversions by the holders of these notes, we
will have to pay an aggregate of $16.4 million in principal, interest and premiums. We do not
expect to be able to make any payments due on the Secured Convertible Notes in stock as the stock
payment conditions of the Secured Convertible Notes contain requirements we cannot meet, including
a requirement that our common stock be selling at $0.40 per share or higher.
The terms of our Asset Purchase Agreement prevent us from incurring more debt without the
prior written consent of Inverness. In addition, the terms of our existing securities greatly
restrict our future financing options. The terms of our Series A Preferred Stock imposes a
limitation on indebtedness not outstanding on March 4, 2005 in excess of $15,300,000, except in
limited forms. While our Secured Promissory Notes are outstanding, we also have restrictions on
incurring additional indebtedness (other than receivables financing not to exceed 80% of our
receivables and equipment purchase or lease financing not to exceed $200,000), as well as
restrictions on our payment of cash dividends and redemption of securities.
35
Moreover, we have granted to a collateral agent on behalf of the holders of the Secured
Promissory Notes a security interest in collateral including some cell lines, equipment, inventory
and general intangibles related to our NMP22 product line, as well as proceeds from any sale of the
product line. We also granted contingent license rights to the collateral agent on behalf of the
holders of the Secured Promissory Notes in the field of bladder cancer detection to some of our
patents related to the NMP22 products, sublicense rights to patents licensed to us and used in
connection with the NMP22 product line, and license rights to trademarks used exclusively in
connection with the NMP22 product line. The NMP22 product line, portions of which serve as
collateral for the Secured Promissory Notes, includes all of our currently commercialized products.
The agreements reflecting the collateral and license arrangements contain restrictions on our sale
or abandonment of the collateral and the patent rights. Further, these agreements afford the collateral agent the right to
assume control of and sell the collateral and to use the license rights exclusively within the
field of bladder cancer detection in the event of our default in our obligations under the Secured
Promissory Notes. If we default on these obligations, and the collateral is sold, we will lose
our primary source of operating income, which would have a material adverse effect on our business
and would severely jeopardize our ability to continue operations.
If we raise additional funds, we may provide rights and preferences to new investors that are
not available to our current stockholders or debt holders. For example, we granted contingent
license rights to portions of our patent portfolio to a collateral agent, on behalf of the holders
of Secured Promissory Notes, and we have granted preferences upon liquidation to holders of our
Series A Preferred Stock. These types of rights and preferences provide a more secure investment
position to the holders of these securities than our common stock investors enjoy. In addition,
our existing financing arrangements contain anti-dilution protection provisions which may require
us to issue additional securities if certain conditions are met. Any future financings will reduce
amounts that may be available for distribution to our common stockholders upon our dissolution
(assuming we receive stockholder approval of and that we consummate the Asset Sale and that we
receive stockholder approval of the dissolution). Future financings may also have an adverse
impact on the price of our common stock and may dilute the ownership interest of our existing
investors.
In September 2006, we received notice from AMEX that we were not in compliance with certain
continued listing standards relative to maintenance of stockholders equity and profitability. In
October 2006, we submitted to AMEX a plan of proposed actions we believed would bring us into
compliance with applicable listing standards no later than March 21, 2008 and in December 2006 we
received notice that AMEX had accepted our plan. AMEX may initiate delisting procedures against us
if we do not make progress consistent with the plan during the plan period or we are not in
compliance with applicable listing standards at the end of the plan period. Delisting of shares of
our common stock would violate terms of some of our financing documents, could result in the
declaration of an event of default in our Secured Convertible Notes and could cause holders to seek
to recover potential damages from us. In addition, any suspension of trading or delisting of our
shares could jeopardize the consummation of the Asset Sale and could make it more difficult for us
to raise any additional capital we may need to continue operations until the closing of the Asset
Sale. Further, suspension of trading or delisting of our shares could seriously impair the ability
of our stockholders to sell shares of our stock.
Any future equity or convertible debenture financings will dilute the ownership interest of
our existing investors and may have an adverse impact on the price of our common stock. The table
below includes shares that have been reserved under the various agreements and plans we have
outstanding and include shares reserved for contingencies which have not yet occurred (such as
future declines in the price of our common stock). As of September 30, 2007, the total shares
reserved were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
Common
|
|
or Exercise Price
|
Security
|
|
Shares
|
|
Low
|
|
High
|
Common stock outstanding
|
|
|
62,220,000
|
|
|
|
|
|
|
|
|
|
Stock reserved for 2006 Secured Convertible Notes
|
|
|
10,883,000
|
|
|
$
|
.40
|
|
|
$
|
.63
|
|
Stock reserved for 2007 Secured Convertible Notes
|
|
|
7,497,000
|
|
|
|
.63
|
|
|
|
.63
|
|
Stock reserved for warrant exercises
|
|
|
20,854,000
|
|
|
|
.63
|
|
|
|
2.70
|
|
Stock reserved for potential warrant shares
|
|
|
631,000
|
|
|
|
.01
|
|
|
|
.01
|
|
Stock
reserved for outstanding stock options and restricted stock units
|
|
|
3,542,000
|
|
|
|
.39
|
|
|
|
6.69
|
|
Stock available for issuance under stock plans
|
|
|
4,232,000
|
|
|
|
|
|
|
|
|
|
Stock reserved for Series A Preferred Stock
|
|
|
1,023,000
|
|
|
|
.70
|
|
|
|
.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
110,882,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The table above includes shares for converting the Series A Preferred Stock and for paying
interest on and repaying the principal of our Secured Convertible Notes. However, as a result of
the trading price range of our common stock, we do not expect to issue additional shares of our
common stock to holders of our Series A Preferred Stock or of our Secured Convertible Notes.
Warrants Repurchases
On July 27, 2007, in anticipation of entering into a strategic transaction, we entered into an
Agreement and Amendment to our Secured Convertible Notes with the holders of a majority of
outstanding principal value of our 2006 Secured Convertible Notes and the holders of a majority of
outstanding principal value of our 2007 Secured Convertible Notes to permit us to redeem the 2003
Warrants. On July 31, 2007, we entered into Purchase and Sale Agreements with all holders of 2003
Warrants to redeem the 2003 Warrants for a purchase price of $0.04 per share and between July
31 and August 10, 2007, we paid an aggregate of approximately $31,373 to redeem all of the 2003
Warrants. If, prior to April 1, 2008, we engage in a transaction that would have triggered an
anti-dilution adjustment to the exercise price of the redeemed 2003 Warrants, we may be required to
make additional payments to these warrant holders.
Financings
On August 30, 2007, we entered into a securities purchase agreement (the Purchase Agreement)
with accredited investors pursuant to which we sold our Series C Notes for an aggregate purchase
price of $3,500,000 (the Financing). The Series C Notes bear interest at the rate of 15% per
annum for the first ninety days after issuance and thereafter bear interest at the rate of 18% per
annum. The scheduled maturity date of the Series C Notes is December 13, 2007, or earlier in the
event of the consummation of a change of control. At the time of repayment, regardless of whether
the Series C Notes are paid at the maturity date, we must also pay a premium of 29% of the
principal amount outstanding. The premium will be amortized to interest expense using the
effective interest method over the life of the Series C Notes.
Prior to the Financing, on August 10, 2007, we amended our Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock of Matritech, Inc. with the written
consent of the holders of more than 75% of the outstanding Series A Preferred Stock, to increase
the amount of indebtedness we may incur, assume or suffer to permit without the prior consent of
the holders of at least 75% of the outstanding Series A Preferred Stock from $12,000,000 to
$15,300,000. On August 9, 2007, we also entered into a Consent with the holders of a majority of
outstanding principal value of our 2006 Secured Convertible Notes and the holders of a majority of
outstanding principal value of our 2007 Secured Convertible Notes to allow us to incur an increased
amount of indebtedness sufficient to permit us to issue additional notes in an aggregate principal
amount not to exceed $3.5 million and ranking on a pari passu basis with the Secured Convertible
Notes as to payment and security. The Consent also directed the collateral agent for the holders
of the Secured Convertible Notes to consent to and enter into an amendment and restatement of the
existing security agreement and contingent license agreement so that the holders of the additional
notes would have a pari passu position with the holders of the Secured Convertible Notes.
In connection with the Financing, we entered into a Second Amended and Restated Security
Agreement with the collateral agent on behalf of itself and the holders of all of our Secured
Promissory Notes, pursuant to which we granted liens against certain assets related to our
NMP22
®
product line. The security interest covers cell lines, equipment, inventory and
general intangibles related to the NMP22 product line, as well as proceeds from the sale of the
product line. We also entered into a Second Amended and Restated Contingent License Agreement with
the collateral agent, granting license rights in the field of bladder cancer detection to some of
our patents related to the NMP22 products, sublicense rights to patents licensed to us and used in
connection with the NMP22 product line, and license rights to trademarks used exclusively in
connection with the NMP22 product line. In connection with the Financing, the holders of the
Series C Notes directed the collateral agent, at the closing of the Asset Sale to (i) release
existing collateral, terminate the Second Amended and Restated Security Agreement, terminate the
Second Amended and Restated Contingent License Agreement and terminate existing UCC-1 financing
statements, and (ii) enter into a pledge agreement, pursuant to which we will grant the collateral
agent a security interest in shares of Inverness common stock equal in value to 150% of the
outstanding amounts owed on the Series C Notes. On August 31, 2007, we and the holders of a
majority of outstanding principal value of the 2006 Secured Convertible Notes and of the 2007
Secured Convertible Notes entered into a Consent that also directs the collateral agent, at the
closing of the Asset Sale to (i) release existing collateral, terminate the Second Amended and
Restated Security Agreement, terminate the Second Amended and Restated Contingent License Agreement
and terminate existing UCC-1 financing statements, and (ii) enter into a pledge agreement, pursuant
to which we will grant the collateral agent a security interest in shares of Inverness common stock
equal in value to 150% of the outstanding amounts owed on the Secured Convertible Notes.
The Series C Notes may become immediately due and payable in cash at a premium of 129% of the
outstanding principal amount plus accrued interest and damages in the event we default under their
terms. Potential defaults would include, among other things:
37
|
|
|
our failure to make payments as they become due;
|
|
|
|
|
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;
|
|
|
|
|
our default on our existing or future liabilities in excess of $250,000, including
the Secured Convertible Notes; and
|
|
|
|
|
a breach of any material term of any other transaction document we entered into with
the purchasers of the Series C Notes.
|
The Series C Notes provide that the holders may not issue a default notice (as defined in the
Series C Notes) for our failure to pay any of the Secured Convertible Notes which become due as a
result of the closing of a change of control transaction, such as the Asset Sale, until the later
of (a) ten business days after a registration statement on Form S-3 is declared effective by the
Securities and Exchange Commission for the resale by us of shares of Inverness common stock we
receive as proceeds of the Asset Sale or (b) the date of the closing of the Asset Sale.
The offer and sale of securities in the transaction described above was exempt from
registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and
Regulation D promulgated thereunder, as a transaction by an issuer not involving any public
offering. The recipients of securities in this transaction represented to us that they acquired
the securities for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities issued in this
transaction.
We received net proceeds of approximately $3.4 million after deducting the estimated expenses
in connection with the Financing. We intend to use the net proceeds from the Financing for general
corporate purposes.
See also, Notes 4, 5 and 6 to the Unaudited Condensed Consolidated Financial Statements for
additional information on our financing transactions.
Contractual Obligations
Our future commitments as of September 30, 2007 are as follows:
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Payment Due by Period
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Less than
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1-3
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3-5
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More than
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Total
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1 year
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years
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years
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5 years
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Operating Lease Arrangements
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$
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1,905,000
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$
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631,000
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$
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1,127,000
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$
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147,000
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|
$
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Capital Lease Arrangements
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37,000
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24,000
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13,000
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Convertible Note Obligations
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11,706,000
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11,706,000
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Series C Note Obligations
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4,670,000
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4,670,000
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Purchase Commitments
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914,000
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914,000
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Service Agreement Commitments
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15,000
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11,000
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4,000
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Total
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$
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19,247,000
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$
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17,956,000
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$
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1,144,000
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$
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147,000
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$
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The $11.7 million of convertible note obligations reflected in the above table primarily
consist of $4.6 million of principal payments, $398,000 of interest and $750,000 of premium on the
2006 Secured Convertible Notes as well as $4.2 million of principal payments, $548,000 of interest
and $1.2 million of premium on the 2007 Secured Convertible Notes.
The $4.7 million of promissory note obligations reflected in the above table primarily consist
of $3.5 million of principal payments, $155,000 of interest and $1.0 million of premium on the
Series C Notes.
On November 3, 2006, we executed a supply agreement with Inverness that contains purchase
commitments for our NMP22 BladderChek Test totaling approximately $1,684,000 over the first two
years of the agreement. For the three and nine month periods ended September 30, 2007, we
purchased $256,000 and $770,000, respectively, of the NMP22 BladderChek Test from Inverness.
38
Service agreement commitments include primarily service and maintenance contracts related to
manufacturing and research operations and equipment. The majority of the service agreement
commitments does not extend past one year and no commitment exceeds $10,000 for any single vendor.
The $1.9 million of operating lease arrangements reflected in the above table primarily
consist of $1.3 million for the lease agreement for our corporate headquarters in Newton,
Massachusetts which expires in December 2010 as well as $339,000 for the lease agreement for our
office in Freiburg, Germany, which expires in January 2011.
We have no material capital expenditure commitments.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities
for purpose of raising capital, incurring debentures or opening parts of our business that are not
consolidated (to the extent of our ownership interest therein) into our financial statements.
However, since inception, we have raised capital on numerous occasions through issuance of common
stock, preferred stock, convertible debentures or Secured Convertible Notes. All those
arrangements include issuance of warrants. Warrants are instruments that qualify as off-balance
sheet arrangements. We have provided further details about those arrangements in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated
Financial Statements and related footnotes. In preparing these Consolidated Financial Statements,
we have made our best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality and assuming that we will continue as a going
concern. However, since application of these accounting policies involves the exercise of judgment
and use of assumptions as to future uncertainties, actual results could differ, potentially
materially, from these estimates.
Historically, there have been no material changes in the assumptions or methodologies used to
determine our estimates. Our estimates have not been materially different from the actual
experiences. On a quarterly basis, we analyze the assumptions and the underlying data used in our
methodologies that determine our estimates. We do not currently expect any material change in the
assumptions or methodologies that are used to determine our estimates.
We believe that the accounting policies described in our Annual Report on Form 10-K for the
year ended December 31, 2006 are critical to understanding our business, results of operations and
financial condition because they involve significant judgments and estimates used in the
preparation of our Consolidated Financial Statements. An accounting policy is deemed to be
critical if it requires a judgment of accounting estimate to be made based on assumptions about
matters that are highly uncertain, and if different estimates that could have been used, or if
changes in the accounting estimates that are reasonably likely to occur periodically, could
materially impact our Consolidated Financial Statements. We reviewed our policies and determined
that those policies remain our critical accounting policies for the three months ended September
30, 2007.
Recent Accounting Pronouncements
We adopted the provisions of FIN 48,
Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109
, on January 1, 2007. This interpretation prescribes new
methodology by which we must measure, report, present, and disclose in our financial statements the
effects of any uncertain tax return reporting positions that we have taken or expect to take. The
interpretation requires financial statement reporting of the expected future tax consequences of
uncertain tax return reporting positions on the presumption that all relevant tax authorities
possess full knowledge of the tax reporting positions as well as all of the pertinent facts and
circumstances, but it prohibits any discounting of these effects for the time value of money. In
addition, the interpretation also mandates expanded financial statement disclosure about
uncertainty in tax reporting positions. The adoption of FIN 48 did not have a material effect on
our financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Investment Portfolio.
We own financial instruments that are sensitive to market and interest
rate risks as part of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations including
39
our
research and development activities. None of these market risk sensitive instruments is held for trading purposes. Our investment policy
prohibits investing in derivatives. The interest rate on our Secured Convertible Notes is fixed.
The interest rate of our Series C Notes is also fixed at fifteen percent per annum for the first
ninety days after issuance, when the interest rate increases to eighteen percent per annum. Please
read this paragraph in conjunction with Note 1 of Notes to Consolidated Financial Statements
Operations and Significant Accounting Policies of our Annual Report on Form 10-K for the year
ended December 31, 2006, filed with the SEC on March 27, 2007 (File No. 001-12128).
We invest our cash in securities classified as cash and cash equivalents. At September 30,
2007, these securities totaled $2.8 million and included money market accounts. Changes in
interest rates affect the investment income we earn on our investments and, therefore, impact our
cash flows and results of operations. A hypothetical 50 basis point decrease in interest rates would result in a decrease in annual interest income and a corresponding increase in net
loss of approximately $8,000 for the period ended September 30, 2007.
Foreign Exchange.
The financial statements of Matritech GmbH are translated in accordance with
SFAS No. 52,
Foreign Currency Translation
. The functional currency of our foreign subsidiary is
the local currency (euro), and accordingly, all assets and liabilities of the foreign subsidiary
are translated using the exchange rate at the balance sheet date except for intercompany
receivables that are of long-term-investment nature, and capital accounts that are translated at
historical rates. Revenues and expenses are translated monthly at the average rate for the month.
Adjustments resulting from the translation from the financial statements of Matritech GmbH into
U.S. dollars are excluded from the determination of net income and are accumulated in a separate
component of stockholders equity. Foreign currency transaction gains and losses are reported in
the accompanying interim condensed consolidated statements of operations and are immaterial to the
results of operations. We had sales denominated in foreign currency of approximately $2,244,000
and $6,301,000, respectively, for the three and nine month periods ended September 30, 2007.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
. Our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls
and procedures were designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were effective.
Additionally, our disclosure controls and procedures were designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the Companys management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
. There was no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
We operate in a rapidly changing environment that involves a number of risks, some of which
are beyond our control. This discussion highlights some of the risks that may affect our business,
the proposed Asset Sale and dissolution and results of operations. These are the risks and
uncertainties we believe are most important for you to consider. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may also affect our
business. If any of the following risks or uncertainties actually occurs, our business, financial
conditions and operating results would likely suffer.
Risk Factors Relating to the Asset Sale
Whether or not the Asset Sale is completed, there may be few, if any, assets available for
distribution to our stockholders.
If the Asset Sale is not completed and we are unable on a timely basis to identify an
alternative source of working capital or enter into an alternative business combination
transaction, we believe that it is likely that we will file for or be forced into
40
bankruptcy. In this event, it is extremely unlikely that we would be able to pay, or provide for the payment of,
all of our liabilities and obligations, and, therefore, there would be no assets available for
distribution to our stockholders.
If the Asset Sale is completed, even though we currently expect that the proceeds received at
the closing will be sufficient to pay, or provide for the payment of, all of our known liabilities
and obligations, it is possible that, in the course of the dissolution process, unknown liabilities
will arise that will cause us to have insufficient proceeds to make distributions to our
stockholders.
Failure to complete the Asset Sale would likely result in us discontinuing our business and
operations, negatively affect our stock price and/or reduce the assets available for distribution
to our stockholders.
If the Asset Sale is not completed for any reason, we would likely be subject to a number of
material risks, including the following:
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We may be unable to dispose of our assets for values equaling or exceeding our
liabilities and obligations, particularly the assets that are the subject of the Asset
Sale, which may be substantially diminished in value;
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We may be unable to secure additional capital or to enter into an alternative
business combination transaction, which would likely force us to resort to bankruptcy
protection since we would be unable to pay our liabilities and obligations when due,
including our liabilities under our outstanding Secured Promissory Notes;
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We would still be required to pay expenses incurred in connection with the
consummation of the Asset Sale, including legal and accounting fees;
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Our employees may, faced with uncertain futures in light of the proposed Asset Sale,
seek alternative employment, which may have a negative impact on our ability to
continue our operations;
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We may be required to pay Inverness a termination fee of $1.08 million; and
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Our customers may, in response to the announcement and pendency of the Asset Sale,
delay or defer purchasing decisions, which would have a negative impact on our ongoing
business.
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The occurrence of any of the above would likely impair our ability to conduct our operations
and business, and force us to discontinue our operations altogether. Any such discontinuation
would likely cause the price of our common stock to decline. In addition, the price of our common
stock may decline further if the current market price of our common stock reflects an assumption
that the Asset Sale will be completed. Additionally, if the Asset Sale is not completed and we are
forced to declare bankruptcy, there may be fewer assets available to distribute to our stockholders
than would be available if the Asset Sale were completed and the plan of dissolution proposal were
approved.
Even if our stockholders approve the Asset Sale, the Asset Sale may not be completed.
The completion of the Asset Sale is subject to numerous closing conditions, some of which are
out of our control, and there can be no guarantee that we will be able to satisfy all of the
closing conditions set forth in the Asset Purchase Agreement. Conditions to closing under the
Asset Purchase Agreement include, for example, Inverness obtaining the consent of its lender with
respect to the Asset Sale, if required, and no material adverse change having occurred with respect
to us during the period prior to the closing of the Asset Sale. As a result, even if the Asset
Sale is approved by the required vote of our stockholders at the special meeting, we cannot
guarantee that the Asset Sale will be completed. If the Asset Sale is not completed, we would not
have sufficient capital to repay our outstanding indebtedness when due, and this would likely force
us to resort to bankruptcy protection.
The Asset Purchase Agreement limits our ability to pursue alternatives to the Asset Sale.
The Asset Purchase Agreement contains provisions that make it more difficult for us to sell
our business to a party other than Inverness. These provisions include the general prohibition on
our solicitation of any acquisition proposal or offer for a competing transaction, the requirement
that we pay a termination fee of $1.08 million if the Asset Purchase Agreement is terminated in
specified circumstances and the requirement that we submit the principal terms of the Asset Sale to
a vote of our stockholders, even if our board of directors changes its recommendation.
These provisions could discourage a third party that might have an interest in acquiring us or
a significant part of our assets from considering or proposing that acquisition, even if that party
were prepared to pay consideration with a higher value than the consideration to be paid by
Inverness. Furthermore, the termination fee may result in a potential competing acquiror offering
to pay a lower per share price to acquire us than it might otherwise have offered to pay. The
payment of the termination fee could also have an adverse effect on our financial condition.
41
Inverness right to be advised of and to submit a new offer not less favorable to us than any
unsolicited third-party acquisition offer, as set forth in the Asset Purchase Agreement, continues
until the termination of the Asset Purchase Agreement, which could make it more difficult for us to
complete an alternative business combination transaction.
All of our outstanding Secured Promissory Notes mature no later than December 13, 2007, and if
the Asset Sale does not close by this date, we may default on these notes.
All of our outstanding Secured Promissory Notes, in the aggregate principal amount of $12.3
million, mature on December 13, 2007, or earlier if the Asset Sale closes prior to that date. If
the Asset Sale does not close prior to December 13, 2007, and if the holders of these outstanding
Secured Promissory Notes do not agree to grant us an extension of this maturity date, we may be
required to obtain additional, alternate financing to enable us to repay these outstanding Secured
Promissory Notes. There can be no guaranty, however, that we will be successful in obtaining this
alternate financing on acceptable terms or at all. As a result, it is possible that if the Asset
Sale has not closed prior to December 13, 2007, we may not have funds available to satisfy our
obligations under our outstanding Secured Promissory Notes and may, as a result, default on these
notes. Further, since these notes are secured by our assets, if we defaulted on our obligations
under these notes, it is possible that the holders of these Secured Promissory Notes could take
action to enforce their security interest in our assets. Were this to occur, we would not likely
be able to consummate the Asset Sale to Inverness or any other business combination transaction.
If the closing of the Asset Sale does not occur prior to December 13, 2007, we would seek extension
agreements from the holders of our outstanding Secured Promissory Notes. We may incur higher
interest costs or other costs in connection with any extension we may negotiate with these note
holders.
A portion of the consideration that may become payable to us is contingent upon the revenue
associated with the assets to be acquired by Inverness being in excess of targets specified in the
Asset Purchase Agreement.
In addition to the consideration to be paid to us at closing, Inverness has agreed to pay
additional consideration of up to $2 million, payable in cash and/or shares of Inverness common
stock, in the event revenue associated with the assets acquired from us is in excess of the targets
specified in the Asset Purchase Agreement during the twelve month period following the closing of
the Asset Sale. The amount of revenue that may be associated with these assets during such
twelve-month period are subject to numerous factors outside of our control, including:
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Inverness ability to leverage our existing customer and distributor relationships;
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Inverness ability to operate our business successfully despite the departure of our
management and other key employees;
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the resources Inverness allocates to our business;
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risks relating to foreign exchange rates; and
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risks affecting our industry in general and our business in particular.
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If the revenues associated with the assets to be purchased by Inverness in the Asset Sale are
not sufficient during such twelve-month period to trigger the payment of some or all of the
additional consideration described above, the amount that will ultimately be distributable to our
stockholders will not be increased.
The market price of Inverness common stock has been historically volatile and is subject to
fluctuations in price and liquidity based on business risks, market conditions and other factors.
As a result, the cash proceeds we will realize from the sale of the Inverness common stock received
in the Asset Sale are uncertain.
If the Asset Sale is completed, Inverness will issue shares of Inverness common stock to us
based on a weighted average closing price per share of Inverness common stock for the ten trading
day period ending on the second trading day immediately prior to the date of the closing of the
Asset Sale. Inverness has committed in the Asset Purchase Agreement to register these shares under
the Securities Act for resale by us, and we expect to be able to resell all of these shares within
a short period following the closing of the Asset Sale. However, it is possible that as a result
of market conditions, securities laws restrictions, restrictions contained in the Asset Purchase
Agreement, or other factors, that we may face unexpected delays in reselling the shares we receive
from Inverness.
We and our stockholders will bear the risks associated with Inverness business, market risks
and any decline in the trading price of Inverness common stock during the period between the date
on which the stock consideration for the Asset Sale is finally valued pursuant to the Asset
Purchase Agreement and the date on which we are ultimately able to resell such shares of Inverness
common stock. The market price of Inverness common stock has been historically volatile. During
the twelve-month period
42
ending on November 6, 2007, the closing price of Inverness common stock
varied from a low of $37.25 to a high of $64.65, and ended that period at $63.33.
We and our stockholders will be exposed to a number of tax-related risks in connection with
the Asset Sale and upon our subsequent dissolution.
The Asset Sale will be treated as a taxable sale of assets and we will report a taxable gain.
The proceeds of the Asset Sale for this purpose will include both the fair market value of the
shares of Inverness common stock delivered to us as consideration for the Asset Sale and our
liabilities to be assumed by Inverness. We will also recognize a gain or loss on our subsequent
liquidation and dissolution, including gain or loss resulting from appreciation or depreciation
(after the closing date) in the value of the Inverness common stock sold by us. If the gains
recognized by us as a result of the Asset Sale and our subsequent liquidation and dissolution
(including sales by us of Inverness common stock) exceed the loss carryforwards currently available
for purposes of either the regular income tax or the alternative minimum tax, we may be exposed to
a tax obligation exceeding the cash available to us to pay such obligation.
Though the Asset Sale will not be taxable directly to our stockholders, our subsequent
dissolution will be taxable to our stockholders. A stockholder will be subject to tax if the fair
market value of the liquidating distributions received (or deemed received, since a distribution
could in the first instance be made to a liquidating trust) exceed the stockholders basis in our
stock. A stockholder will recognize a loss for tax purposes if the fair market value of the
liquidating distributions received (or deemed received, since a distribution could be made in the
first instance to a liquidating trust) are less than the stockholders basis in our stock. Though
our stockholders may recognize taxable income on gains in their shares of our stock at the time
that the initial or any interim distributions are made, our stockholders will not generally be able
to recognize any tax loss until we make our final distribution to our stockholders, which may not
occur until 2012.
Our stockholders would also be taxed on gains and losses realized by a liquidating trust, if
any. Because there can be no assurance that distributions from such a trust would be available for
this purpose, our stockholders may have to satisfy any resulting tax obligations from other
resources.
We may have undergone an ownership change for purposes of Section 382 of the Internal
Revenue Code, which could affect our ability to offset gains.
We do not believe that we have undergone an ownership change within the meaning of Section
382 of the Internal Revenue Code of 1986, as amended (the Code), as a result of the number of
financing transactions involving equity instruments we have completed during the past five years.
This belief, however, is subject to uncertainty because the calculations are complex and because
the ultimate determination of these matters may be made by the Internal Revenue Service and not by
us. Generally, if we have experienced a change of control at any time since our formation,
utilization of our NOL or R&D credit carryforwards would be subject to an annual limitation under
Section 382. If we have undergone one or more of these changes, our net operating losses existing
as of the date of each ownership change may be unavailable in whole or in large part to offset
gains from the sale of our assets to Inverness.
If we are unable to offset fully for tax purposes gains recognized in respect of the Asset
Sale with our tax loss carryforwards, we may incur a federal income tax liability that could
materially and adversely affect the amount otherwise available for distribution to our
stockholders.
Certain of our directors and executive officers have interests in the Asset Sale that may be
different from, or in addition to, the interests of our stockholders.
When considering our board of directors recommendation that our stockholders vote in favor of
the Asset Sale, our stockholders should be aware that some of our directors and executive officers
have interests in the Asset Sale that may be different from, or in addition to, the interests of
our stockholders. These interests include agreements that provide for various payments following a
change of control such as the Asset Sale, the acceleration of the vesting of restricted stock,
restricted stock units and stock options, and the right to continued indemnification and insurance
coverage for acts or omissions occurring prior to the Asset Sale. In addition, one of our
directors holds, and is also affiliated with various investment funds that also hold, outstanding
Secured Promissory Notes and Series A Preferred Stock issued by us that will be repaid in full
(including applicable prepayment premiums) with respect to the notes or paid in a liquidating
premium with respect to the Series A Preferred Stock following the Asset Sale. As a result of
these interests, these directors and executive officers could be more likely to recommend a vote in
favor of the Asset Sale than if they did not hold these interests, and may have reasons for doing
so that are not the same as the interests of our other stockholders. Our board of directors
discussed these interests prior to voting to approve the Asset Sale and those directors who could
be deemed to be interested in the Asset Sale recused themselves from the actual vote approving
the Asset Sale.
43
If our stockholders do not approve the name change, we will be in breach of the Asset Purchase
Agreement.
Under the Asset Purchase Agreement, we are selling all of our intellectual property, including
our trademarks, which includes the name Matritech. Under the Delaware General Corporation Law,
we must seek stockholder approval in order to change our name in our certificate of incorporation.
If the Asset Sale is approved by our stockholders, but the name change is not approved by our
stockholders, we will be in breach of the Asset Purchase Agreement.
Risk Factors Relating to Our Dissolution
Our stockholders could approve the Asset Sale but vote against the plan of dissolution.
If we obtain stockholder approval of the Asset Sale and complete the Asset Sale, but do not
obtain stockholder approval of the plan of dissolution, we would have to continue our business
operations from a very difficult position in light of the sale of substantially all of our assets
and our announced intent to liquidate and dissolve. Assuming the completion of the Asset Sale, we
will have no assets with which to generate operating revenue and likely will have retained only
those employees required to wind up our corporate existence. Further, we do not intend to invest
in another operating business following the closing of the Asset Sale. If the plan of dissolution
is not approved, we would be forced to use any remaining cash and the cash received from the sale
of the Inverness common stock received as consideration in the Asset Sale to pay ongoing operating
expenses instead of making a distribution to our stockholders pursuant to the plan of dissolution.
We cannot determine at this time the amount or timing of any distributions to our stockholders
because there are many factors, some of which are outside of our control, that could affect our
ability to make such distributions.
We cannot determine at this time when, or potentially whether, we will be able to make any
distributions to our stockholders or the amount of any such distributions. Those determinations
depend on a variety of factors, including, but not limited to, whether the Asset Sale closes; the
timing of the closing of the Asset Sale; the amount we will be required to repay under our
outstanding Secured Promissory Notes issued in January 2006, January 2007 and August 2007; the
amount we will be required to pay pursuant to change of control agreements; restrictions set forth
in the Asset Purchase Agreement on our ability to make distributions; the amount of brokerage fees
or costs of hedging transactions that we incur to minimize the market risk we face in order to sell
the shares of Inverness common stock we will receive upon the closing of the Asset Sale; our
operating costs through the date of our final dissolution; the amount of our liabilities to be paid
in the future; the amount that we will realize upon our sale of the Inverness common stock to be
received as consideration in the Asset Sale; potential limitations on the use of net operating loss
carryforwards to offset taxable gain; the resolution of currently known contingent liabilities; the
amount of unknown or contingent liabilities of which we become aware through the dissolution
process; general business and economic conditions; and other matters.
We will continue to incur claims, liabilities and expenses from operations (such as operating
costs, salaries, directors and officers insurance, payroll and local taxes, legal and accounting
fees and miscellaneous office expenses) as we seeks to close the Asset Sale and effect the
dissolution. Our estimates regarding our expense levels may be inaccurate. Any unforecasted or
unexpected claims, liabilities or expenses that arise before liquidation and final dissolution or
any claims, liabilities or expenses that exceed our estimates would likely reduce the amount of
cash available for ultimate distribution to our stockholders. Further, if available cash and
amounts received on the sale of the Inverness common stock to be received in the Asset Sale are not
adequate to provide for all of our obligations, liabilities, expenses and claims, we will not be
able to distribute any amount at all to our stockholders.
The amount of cash proceeds we will ultimately distribute to our stockholders is subject to
significant uncertainties, many of which are beyond our control. Examples of uncertainties that
could reduce the value of or eliminate distributions to our stockholders include the following:
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the amount of our liabilities and obligations or the estimated costs and expenses of the
Asset Sale and our operations until the date we are authorized to make a distribution to
our stockholders under the applicable provisions of the Delaware General Corporation Law
and the plan of dissolution, which date is not expected to be less than 210 days from the
date of our filing of a certificate of dissolution with the Secretary of State of the State
of Delaware, could increase;
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presently unknown or contingent liabilities for which we may be responsible could later
arise or become fixed in amount and we would be required to satisfy or reserve for these
liabilities as part of the dissolution;
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delays in completing the Asset Sale or delays in the timing of our dissolution could
result in additional fees and expenses and result in reduced distributions to our
stockholders;
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44
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the value of Inverness common stock could decline from its value as calculated under the
Asset Purchase Agreement to the cash amount we actually receive when we are able to resell
the shares of Inverness common stock we will receive at the closing of the Asset Sale; and
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Inverness could make claims under the indemnity provisions of the Asset Purchase
Agreement.
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For the foregoing reasons, there can be no assurance as to the timing and amount of
distributions to our stockholders, even if the Asset Sale is completed.
We are required to make priority distributions to holders of our Series A Preferred Stock as a
result of the Asset Sale before making liquidating distributions to holders of our common stock.
Under our certificate of incorporation, the holders of Series A Preferred Stock are entitled
to receive a fixed, priority distribution in the amount of $8.80 per share upon the closing of the
Asset Sale. The aggregate priority distribution we will be required to pay in respect of all
currently outstanding shares of our Series A Preferred Stock is $716,311. We currently expect to
make the required priority payment on our Series A Preferred Stock shortly after the closing of the Asset Sale and our sale of the shares of
Inverness common stock received in consideration of the Asset Sale, following the repayment of all
of our secured indebtedness and creation of a reserve for our other obligations and liabilities.
Distribution of cash proceeds, if any, to our stockholders could be delayed and our
stockholders could, in some circumstances, be held liable for amounts they received from us in
dissolution.
Although our board of directors has not established a firm timetable for distributions to our
stockholders, the board of directors intends, subject to contingencies inherent in the winding up
of our business and the payment of our obligations and liabilities, to distribute all of the cash
that we receive upon the sale of the shares of Inverness common stock we will receive as
consideration in the Asset Sale. We do not anticipate making any distributions to our stockholders
until we have repaid all of our obligations and liabilities and complied with the requirements of
the Delaware General Corporation Law for companies in dissolution, including requirements for the
creation and maintenance of adequate contingency reserves. Thereafter, we anticipate making
distributions to our stockholders as promptly as practicable in accordance with the plan of
dissolution and the dissolution process selected by our board of directors in its sole discretion.
We are, however, currently unable to provide the exact timing of any distribution to our
stockholders as part of this wind up and dissolution process, though we anticipate that it is
unlikely that we will make any distribution to our stockholders for a minimum of 210 days from the
date on which we file our certificate of dissolution with the Secretary of State of the State of
Delaware, all in accordance with applicable provisions of the Delaware General Corporation Law.
Under the Delaware General Corporation Law, we will continue to exist for three years after
the dissolution of the corporation becomes effective or for such longer period as the Delaware
Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and
enabling us to wind up our business, to dispose of our property, to discharge our liabilities and
to distribute to our stockholders any remaining assets. Under the Delaware General Corporation
Law, in the event we fail to create an adequate contingency reserve for payment of our expenses and
liabilities during this three-year period, each of our stockholders could be held liable for
payment to our creditors of such stockholders pro rata share of amounts owed to creditors in
excess of the contingency reserve, up to the amount actually distributed to such stockholder.
Accordingly, each of our stockholders could be required to return all distributions previously
made to it, and as a result, it could receive nothing from us under the plan of dissolution.
Moreover, in the event one of our stockholders has paid taxes on amounts previously received from
us, a repayment of all or a portion of such amount could result in that stockholder incurring a net
tax cost if the stockholders repayment of an amount previously distributed does not cause a
commensurate reduction in taxes payable. There can be no assurance that the contingency reserve we
will establish will be adequate to cover all of our remaining expenses and liabilities.
It is also possible that one of our creditors could seek an injunction against the making of
distributions to our stockholders on the basis that the amounts to be distributed are needed to
provide for the payment of our liabilities and expenses. Any action of this type could delay or
substantially diminish the amount available for distribution to our stockholders.
We will continue to incur claims, liabilities and expenses that will reduce the amount
available for distribution to our stockholders.
We will continue to incur claims, liabilities and expenses from operations (including
operating costs such as salaries, directors fees, directors and officers insurance, payroll and
local taxes, legal and accounting fees and miscellaneous office expenses) as we seek to consummate
the Asset Sale and wind up our operations. For example, we anticipate that the amount of severance
payments, change of control payments and retention bonuses we will have to pay to our employees
will be approximately $3.9 million and will
45
be paid upon or shortly after the closing of the Asset
Sale. Though not currently expected to be the case, if the proceeds that we receive upon our sale
of the Inverness common stock to be received in consideration of the Asset Sale is not adequate to
provide for the full repayment of our obligations, liabilities, expenses and claims, we will not be
able to distribute any assets to our stockholders.
Our stock transfer books will close on the date we file the certificate of dissolution with
the Delaware Secretary of State, after which it will not be possible for stockholders to trade our
stock.
We will close our stock transfer books and discontinue recording transfers of our common stock
at the close of business on the date we file the certificate of dissolution with the Secretary of
State of the State of Delaware. Thereafter, certificates representing shares of our common stock
shall not be assignable or transferable on our books. The proportionate interests of all of our
stockholders shall be fixed on the basis of their respective stock holdings at the close of
business on that date, and, thereafter any distributions made by us shall be made solely to the
stockholders of record at the close of business on that date.
We will continue to incur the expenses of complying with public company reporting
requirements.
Following the Asset Sale and through the subsequent dissolution, we have an obligation to
continue to comply with the applicable reporting requirements of the Securities Exchange Act of
1934, as amended, even though compliance with these reporting requirements is economically
burdensome. In order to curtail expenses, we intend, after filing our certificate of dissolution,
to seek relief from the SEC from the reporting requirements under the Exchange Act. We anticipate
that, if such relief is granted, we would continue to file current reports on Form 8-K to disclose
material events relating to our liquidation and dissolution, along with any other reports that the
SEC might require, but would discontinue filing annual and quarterly reports on Forms 10-K and 10-Q. However, the SEC may not grant any such
relief. To the extent that we delay filing the certificate of dissolution, we would be obligated
to continue complying with the applicable reporting requirements of the Exchange Act. The expenses
we incur in complying with the applicable reporting requirements will reduce the assets available
for ultimate distribution to our stockholders.
If we fail to retain the services of appropriate personnel, the plan of dissolution may not
succeed.
The success of the plan of dissolution depends in large part upon our ability to retain the
services of qualified personnel who will be charged with operating the Company following the
closing of the Asset Sale. The retention of qualified personnel may be particularly difficult
under our current circumstances. There can be no assurance that we will be successful in retaining
the services of such qualified personnel or that we will be able to retain the services of such
qualified personnel for the amounts we are willing to pay for such services.
Risk Factors Relating to Matritech
We may need to obtain additional capital in order to continue our operations.
At September 30, 2007, we had cash and cash equivalents of $2.8 million, negative working
capital of $10.8 million and a net loss of $4.8 million in the fiscal quarter ended September 30,
2007, which raises substantial doubt about our ability to continue as a going concern. Although we
completed a financing in August 2007, it realized net proceeds of only approximately $3.4 million.
We expect to use the proceeds from this financing to fund our operations through the closing of the
Asset Sale. However, it is possible that we will need to secure additional capital if the closing
of the Asset Sale is delayed beyond December 13, 2007 or if we incur either large unanticipated
expenses or a significant decrease in revenue. In such circumstances, if we were not able to
receive an adequate amount of additional financing on a timely basis, we would be required to cease
operations.
If we do not consummate the Asset Sale before December 13, 2007, we will need to renegotiate
our outstanding debt or face defaulting on our obligations, which could jeopardize our ability to
consummate the Asset Sale.
Currently, we have entered into agreements with the holders of more than 96% of the
outstanding principal balance of our Secured Convertible Notes issued in January 2006 and January
2007 to defer any further payments on the Secured Convertible Notes until the earlier to occur of
the December 13, 2007 maturity date or the closing of a change of control transaction such as the
Asset Sale. Prior to the maturity date of the Secured Convertible Notes, we are still required to
make monthly payments to the holders of the Secured Convertible Notes who have not agreed to defer
the payments. If we are required to use our limited cash resources to make payments to
non-deferring holders, we will need additional financing earlier than otherwise projected.
If the Asset Sale has not yet occurred, all of our Secured Promissory Notes will become due
and payable in full on December 13, 2007, unless the secured creditors agree to a further
postponement of the due date. If all ongoing payments on the Secured Promissory Notes were
postponed until and become due on December 13, 2007, the amount we would then be required to pay
for accrued interest and principal would be approximately $13.4 million. Additional amounts, up to
approximately $3.0 million, would
46
also be due as a payment premium on the Secured Promissory Notes.
We expect to have to pay all amounts due on our Secured Promissory Notes in cash, and if the Asset
Sale has not been completed by December 13, 2007, we would likely not have the cash available to
make these payments on our Secured Promissory Notes.
Our failure to make timely payments on our Secured Promissory Notes would constitute an event
of default under our Secured Promissory Notes and would likely result in our inability to continue
operations, as further described in Risk Factors We may be unable to comply with provisions of
our Secured Promissory Notes and could suffer significant consequences in the event of
non-compliance. In addition, any default under our Secured Promissory Notes could seriously
jeopardize our ability to close the Asset Sale.
If we are unable to close the Asset Sale, we expect that we will need to continue to obtain
additional capital in the future until we become profitable and, if we are unable to obtain such
capital on a timely basis, we likely will not be able to continue our operations.
We have never been profitable and do not expect to be profitable in the near future. In the
fiscal year ended December 31, 2006, we had an operating loss of $8.0 million and a net loss of
$11.9 million. For the nine-month period ended September 30, 2007, we had an operating loss of
$6.3 million and a net loss of $13.6 million. From March 2003 through August 2007, we raised
capital on seven occasions through the sale of various debt and equity securities. We will, as we
deem necessary or prudent and subject to the terms and conditions of the Asset Purchase Agreement
with Inverness and our various outstanding debt and equity agreements, continue to seek to raise
additional capital through various financing alternatives, including equity or debt financings,
issuances of securities convertible into equity and corporate partnering arrangements. However, we
have had great difficulty obtaining additional financing over the past year and may be unable to
raise further capital.
The terms of our Series A Preferred Stock and Secured Promissory Notes greatly restrict our
ability to raise additional capital. Under the terms of the Series A Preferred Stock, we are
prohibited from issuing senior equity securities or having indebtedness in excess of $15.3 million
except in limited forms. Under the terms of our Secured Promissory Notes, we are prohibited from
issuing any debt securities or incurring any indebtedness except in limited forms and in limited amounts. In addition, under the Asset Purchase
Agreement, we are not permitted to incur additional indebtedness without Inverness prior written
consent. These provisions place severe limits on our ability to raise additional financing.
If we do not consummate the Asset Sale and do not receive an adequate amount of additional
financing in the future on a timely basis, we will likely be unable to fund future cash operating
deficits or to meet our cash payment obligations required by our Secured Promissory Notes. As a
result, we would likely be required to shut down our operations.
We may be unable to comply with provisions of our Secured Promissory Notes and could suffer
significant consequences in the event of non-compliance.
Our Secured Promissory Notes impose substantial penalties in the event we fail to comply with
their terms. Potential events of default under the Secured Convertible Notes issued in January of
2006 and 2007 include:
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failure to make payments as they become due;
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failure to remain listed on any of the Nasdaq Stock Market, the New York Stock
Exchange or AMEX;
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failure to have an effective registration statement available
for resale of the shares (except in the case of the January 2007 Secured Convertible Notes only if
registration has been demanded);
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failure to timely remove restrictive legends from any stock certificates delivered
upon conversion;
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written notice or public announcement of our intention not to issue shares upon
conversion;
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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;
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bankruptcy, insolvency or similar proceedings being filed by or against us or any
subsidiary;
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the acquisition of our business, whether by merger, a sale or disposition of
substantially all of our assets, or otherwise;
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a default on our existing or future liabilities in excess of $250,000; and
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a breach of any material term of any other transaction document we entered into with
the purchasers of these Secured Convertible Notes.
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In addition, potential events of default under the August 2007 Series C Notes include:
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failure to make payments as they become due;
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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 its property or
business or that of any subsidiary;
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bankruptcy, insolvency or similar proceedings being filed by or against us or any
subsidiary;
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a default on our existing or future liabilities in excess of $250,000; and
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a breach by us of any material term of any other transaction document entered into
with the purchasers of these Series C Notes.
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If we default on our obligations under the Secured Convertible Notes issued in January 2006
and 2007, we could be required to pay interest and liquidated damages, and the Secured Convertible
Notes could become immediately due and payable in cash at a premium of up to 125% of the
outstanding principal amount plus accrued interest. In addition, if we default on our obligations
under the Series C Notes issued in August 2007, we could be required to pay interest and the Series
C Notes could become immediately due and payable in cash at a premium of up to 129% of the
outstanding principal amount. The holders of our Secured Promissory Notes, through the collateral
agent to whom we granted a security interest in collateral relating to its NMP22 product line,
could assume control of and sell the collateral, which consists of certain cell lines, equipment,
inventory and general intangibles related to our NMP22 product line, as well as proceeds from any
sales of the product line. Any of these events would jeopardize our financial position and
viability as a going concern, as well as our ability to consummate the Asset Sale.
We have incurred substantial indebtedness and may be unable to service our debt.
As a result of sales of the Secured Promissory Notes, we substantially increased our
indebtedness from approximately $0.8 million at the end of 2005 to approximately $12.4 million as
of September 30, 2007. The Secured Convertible Notes issued in January 2006 and January 2007 bear
interest at the rate of 15% per annum, and the Series C Notes issued in August 2007 bear interest
at 15% per annum for the first 90 days they are outstanding and, thereafter, at 18% per annum.
This level of indebtedness could, among other things:
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make it difficult for us to make payments on this debt and other obligations;
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make it difficult for us to obtain future financing;
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require us to redirect significant amounts of cash flow from operations to service
our indebtedness;
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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
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make us more vulnerable to bankruptcy.
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We have granted a security interest in our NMP22 product line that restricts our operation of,
and could result in the loss of all assets related to, this product line if we default on our
obligations.
We granted to SDS Capital Group SPC, Ltd., as collateral agent for the holders of the Secured
Promissory Notes, a security interest in collateral including some cell lines, equipment, inventory
and general intangibles related to the NMP22 product line, as well as proceeds from any sale of
that product line pursuant to a Second Amended and Restated Security Agreement. The collateral
excludes receivables for product sales. The security interest covers assets related to both our
NMP22 Test Kit and NMP22 BladderChek Test, the two products that represented approximately 92% of
our product sales in 2006 and 92% for the nine months ended September 30, 2007. We also entered
into a Second Amended and Restated Contingent License Agreement with the collateral agent granting
license rights in the field of bladder cancer detection to some of our patents related to the NMP22
products, sublicense rights to patents licensed to us and used in connection with the NMP22 product
line, and license rights to trademarks used exclusively in connection with the NMP22 product line.
The Security Agreement and License Agreement impose restrictions on our sale or abandonment of the
collateral and the patent rights. Further, these agreements afford the collateral agent the right
to assume control of and sell the collateral and to use the license rights exclusively within the
field of bladder cancer detection in the event of our default in our obligations under the Secured
Promissory Notes. If we default on these obligations, and the collateral is
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sold, we will lose our
primary source of revenue, which would have a material adverse effect on our business and would
severely jeopardize our ability to continue operations and to complete the Asset Sale.
We have a history of operating losses, are continuing to lose money and may never be
profitable.
We have incurred losses since we began operations in 1987. These losses have resulted
principally from costs incurred in research and development and from selling, general and
administrative costs associated with our market development and selling efforts. Our accumulated
deficit from inception through September 30, 2007 is $123 million. Our product sales and net loss
for each of the past three fiscal years and the nine months ended September 30, 2007 have been:
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Through
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September 30,
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2004
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2005
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2006
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2007
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Product Sales, net of all allowances
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$
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7,275,000
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$
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10,290,000
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$
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12,085,000
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$
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10,011,000
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Net Loss
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$
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11,123,000
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$
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7,865,000
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$
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11,935,000
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$
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13,553,000
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We expect to continue to incur additional operating losses in the future.
We may fail to meet the standards for continued listing of shares of our common stock on the
American Stock Exchange or for listing of such shares on another national exchange.
National stock trading exchanges, including the American Stock Exchange, or AMEX, where our
common stock is currently listed, maintain standards and requirements for initial and continued
listing of securities. In September 2006, we received notice from AMEX that we were not in
compliance with certain continued listing standards relative to maintenance of stockholders equity
and profitability. On October 23, 2006, we submitted to AMEX a plan of proposed actions we
believed would bring us into compliance with applicable listing standards no later than March 21,
2008. On December 8, 2006, we received notice that AMEX had accepted our plan. AMEX may initiate
delisting procedures against us if we do not make progress consistent with our submitted plan
during the plan period or if we are not in compliance with applicable listing standards at the end
of the plan period. Delisting of shares of our common stock would violate terms of our various
financing documents, could result in the declaration of an event of default on our Secured
Convertible Notes and could cause the note holders to seek to recover potential damages from us.
Further, under the Asset Purchase Agreement, we have agreed that we will use commercially
reasonable efforts to continue the listing of shares of our common stock on AMEX through the closing of the Asset Sale. Any suspension of trading or
delisting of our shares could make it more difficult for us to raise needed additional capital on
terms acceptable to us or at all and could seriously impair the ability of our stockholders to sell
shares of our common stock.
Market volatility and fluctuations in the price of our common stock, and trading volume may
cause sudden decreases in the value of an investment in our common stock.
The market price of our common stock has historically been, and is likely to continue to be,
volatile. The price of our common stock has ranged between $0.10 and $0.85 in the fifty-two week
period ended September 30, 2007. The stock market has from time to time experienced extreme price
and volume fluctuations, particularly in the biotechnology sector, which have often been unrelated
to the operating performance of particular companies. Factors such as announcements of
technological innovations or new products by our competitors or disappointing results by third
parties, as well as market conditions in our industry, may significantly influence the market price
of our common stock. For example, in the past, the market price of our common stock has been
affected by announcements of clinical trial results and technical breakthroughs at other
biotechnology companies as well as our own public announcements regarding such things as quarterly
sales and earnings, regulatory agency actions and corporate partnerships. Consequently, events
both within and beyond our control may cause shares of our stock to lose their value rapidly.
In addition, sales of a substantial number of shares of our common stock by stockholders could
adversely affect its market price. In the third quarter of 2007, our common stock only had an
average daily trading volume of approximately 269,000 shares. We may be required to file a resale
registration statement if we receive a valid demand for registration of shares that may be issued
upon conversion of the Secured Convertible Notes issued in January 2007 or exercise of the
accompanying warrants. In connection with our January 2006 private placement of Secured
Convertible Notes and warrants, we filed two resale registration statements covering an aggregate
of up to 25,797,839 shares of our common stock for the benefit of the selling security holders. In
connection with our March 2005 private placement of Series A Preferred Stock and warrants, we filed
a resale registration statement covering up to 18,922,917 shares of our common stock for the
benefit of those investors. In connection with our March 2004 private placement of our common
stock and accompanying warrants, we filed a resale registration statement covering up to 7,121,031
shares of our common stock for the benefit of those investors. We have also filed numerous resale
registration statements in connection with previous sales of our equity securities. The actual or
anticipated resale by such investors under these registration statements may depress the market
price of our common stock. Bulk sales of shares of our common stock in a short period of time
could also cause the market price of our common stock to decline.
49
Future equity or convertible debenture 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.
If the Asset Sale is not completed, we expect that we will need to raise additional capital in
the future to continue our operations. In order to fund our operations, we had raised additional
capital from 2003 through August 2007 through the sale of debt and equity securities, and if the
Asset Sale is not completed, we expect that we will continue to require additional capital to fund
our operations and may seek to raise this capital through the sale of equity-related instruments.
Any future equity-related financings will dilute the ownership interest of our existing investors
and may have an adverse impact on the price of our common stock.
In addition, the terms of the Series A Preferred Stock and the Secured Convertible Notes
provide for anti-dilution adjustments to their conversion prices and to the exercise prices of the
accompanying warrants. We are also contractually obligated to make top-off payments upon demand
of the former holders of the warrants issued in March 2003 in the event we engage in a transaction
that would have been a dilutive issuance under the March 2003 warrants.
The Series A Preferred Stock and the accompanying warrants issued in connection with our March
2005 private placement also include anti-dilution protection provisions that were triggered by the
sale of the Secured Convertible Notes issued in January 2006. As a result, the conversion price of
the Series A Preferred Stock was reduced from $0.88 per share to $0.70 per share and the exercise
price of the March 2005 warrants was reduced from $1.47 per share to $1.34 per share. Both the
Series A Preferred Stock and the March 2005 warrants have reached their contractual floor prices
and further dilutive issuances will not result in any further reduction in conversion or exercise
price for these securities.
The sale of 2007 Secured Convertible Notes in January 2007 triggered the anti-dilution
protection provisions of the 2006 Secured Convertible Notes and accompanying warrants issued in
January 2006. As a result, both the conversion price of the 2006 Secured Convertible Notes and the
exercise price of the warrants issued in January 2006 were reduced from $0.65 and $0.67,
respectively, to $0.63 per share. Future dilutive issuances could result in further reduction of
the conversion price and exercise price of the 2006 Secured Convertible Notes and accompanying
warrants issued in January 2006.
The 2007 Secured Convertible Notes and accompanying warrants issued in January 2007 also
contain anti-dilution protection provisions. Currently, these 2007 Secured Convertible Notes are
convertible to our common stock at a price of $0.63 per share and the accompanying warrants are
exercisable at an exercise price of $0.63 per share. If we complete a future financing at a price
of less than $0.63 per share the conversion price of the 2007 Secured Convertible Notes would be
reduced to the new financing price per share and the exercise price of the warrants issued in
January 2007 would be reduced to the new financing price per share.
We will not be able to significantly increase revenue or achieve profitability unless we
increase the number of urologists using our NMP22 BladderChek Test, increase the per-urologist
usage of our tests and/or successfully penetrate markets other than urologists.
Currently, the primary market for our NMP22 BladderChek Test consists of urologists who
utilize our NMP22 BladderChek Test as an adjunct to their cystoscopic examination of patients for
detecting initial cases of bladder cancer and monitoring diagnosed cases for recurrence. We have
focused our sales and marketing on developing urologist users for either or both of these
applications. In order to achieve increased revenue and profitability, we must increase sales to
urologists, increase the usage per urologist and/or expand the market for our product to other
physicians, such as gynecologists and primary care doctors. While we have had success in
developing new urologist customers, we are still in the early stages of convincing a large number
of them to use the test more widely than their current practice. In addition, we have had limited
experience in implementing our strategy of expanding users to include gynecologists and other
physicians in Germany. In the United States, we have not yet implemented a program to sell our
NMP22 BladderChek Tests to physicians other than urologists and we may not be successful in
penetrating these physician markets. We may not be able to significantly expand the categories of
physicians who use our NMP22 BladderChek Test. Failure to achieve one or more of these objectives
may significantly limit our long term revenue potential and may require substantially more
investment to achieve profitability.
If we are unable to manufacture or otherwise obtain the product volumes we need, we may be
unable to meet commitments to our customers and our results of operations would suffer.
We currently manufacture our NMP22 Test Kits and package our NMP22 BladderChek Tests in our
Newton, Massachusetts facility but rely on third party vendors for certain components and processes
for each of these products. Neither we nor our vendors have experience in manufacturing and
assembling the NMP22 Test Kits and BladderChek Tests in large volumes. As a result of the
execution in November 2006 of a supply agreement with Inverness, we have arranged for Inverness to
become an additional supplier for this product and to have multiple manufacturing locations for the
NMP22 BladderChek Test. However, the ability of a new manufacturer to make this product
satisfactorily is largely untested, as is the ability of a new manufacturer to produce large
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volumes of the product satisfactorily and on a timely basis. Further, the United States Food
and Drug Administration, or the FDA, must approve and qualify any new manufacturing locations of
the NMP22 BladderChek Test before tests manufactured at the new location can be sold in the United
States. We expect the sales volume of our NMP22 BladderChek Test will generally continue to grow,
although we expect that quarter-over-quarter sales may not always increase and the rate of increase
will likely not remain constant. We and/or the suppliers of the NMP22 BladderChek Test may
encounter difficulties in scaling up production of products, including problems involving:
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production yields;
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quality control and assurance;
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component supply; and
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shortages of qualified personnel.
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These problems could make it difficult to produce sufficient quantities of product to satisfy
customer needs and could result in customer dissatisfaction and decreased sales. In addition, if
quality problems arise or if we need to undertake any significant manufacturing changes in order to
achieve desired product volumes, we may be subject to review and/or other action by the
governmental authorities that extensively regulate our manufacturing operations.
If we lose the services of our suppliers or assemblers, we may be unable to meet commitments
to our customers and our results of operations would suffer.
We do not currently have alternative suppliers manufacturing our NMP22 BladderChek Tests or
providing processes for our NMP22 Test Kits. Unless and until we secure additional suppliers for
our NMP22 BladderChek Test and for processes for our NMP22 Test Kit, and we demonstrate to the FDA
that additional suppliers are equivalent to our current sources, we will be at risk of disruption
of our product supply and may be unable to meet our sales commitments to customers. Although we
have executed a supply agreement with Inverness for our NMP22 BladderChek Test, and Inverness plans
on having multiple manufacturing locations qualified and available for the manufacture of this
product, to date the product is being manufactured at only one location and only one location has
been qualified. We have not yet obtained approval from the FDA to use a different manufacturing
location. We may face delays in securing FDA approval for use of an additional manufacturing
location for our NMP22 BladderChek Test, and we may not be able to secure the necessary approval at
all. In that event, we would expect that our product would continue to be manufactured at the same
location it has been for several years. While we attempt to maintain an adequate level of
inventory to provide for contingencies such as key product components becoming unavailable or
available in insufficient quantities, or an assembler failing to meet our requirements, our
inventory levels may not be adequate to meet our commitments for an extended period of time. We
may be forced to modify our products to enable another supplier or another manufacturing location
to meet our requirements, or we may be required to cease production and sale of our products
altogether if our existing supply sources do not continue to provide sufficient quantities of
product to us for whatever reason. Any product modification or cessation of production and sale of
our products would likely cause us to fail to satisfy our sales commitments to our customers. Our
failure or delay in meeting our sales commitments would likely cause sales to decrease, could
result in significant expense to obtain alternative sources of supply or assembly with the
necessary facilities and know-how, and would negatively affect our results of operations.
We may need to stop selling our NMP22 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.
Our NMP22 BladderChek Test uses lateral flow technology consisting of an absorbent material
that soaks up urine from a small reservoir at one end of the container housing the test strip and
exposes the urine to chemicals and antibodies arranged on the surface of or imbedded in the test
strip. After a reaction with our proprietary antibodies, a test result appears in a window located
on the container housing the test strip. The manufacture, use, sale, or import of point-of-care
products that include lateral flow technology requires us to obtain patent licenses in some
jurisdictions. In August 2004, we entered into a license agreement, effective as of April 1, 2004,
with Abbott Laboratories, which holds patent rights in the lateral flow area. In November 2006, we
entered into a supply agreement with Inverness, which holds substantial patent rights in the
lateral flow area covering the professional field, including licensed health care providers and
diagnostic laboratories. As part of this agreement, we have secured protection from claims by
Inverness of infringement of Inverness lateral flow patent rights for products we purchase from
Inverness and resell in the professional field. Inverness has also agreed not to sue us, our
resellers, distributors and end-customers for infringement of these lateral flow patent rights for
products sold prior to November 3, 2006. If we are unable to obtain any additional patent licenses
that we need or similar protection from infringement claims in order to permit us to make, use,
sell, or import our NMP22 BladderChek Test products in the United States or in other jurisdictions,
we will have to stop selling our NMP22 BladderChek Tests in these jurisdictions until the
expiration of the relevant patents or until we are able to develop
an alternative non-infringing design solution that uses a different technology. We may not,
however, be able to do this on a timely basis. In
51
addition, we may also be subject to litigation
that seeks a percentage of the revenues we have received from the sale of our NMP22 BladderChek
Tests. We accrue estimated royalties on sales of our NMP22 BladderChek Test based on estimates of
our obligations under existing licensing agreements and, when probable and estimable, based upon
our appraisal of intellectual property claims to which we may be subject. If we are required to
obtain additional licenses, the additional royalties due for those licenses may substantially
reduce our gross profits and make it difficult or impossible for us to achieve profitability
without new products or sources of revenue.
We have not identified or been advised by third parties of any rights owned by others that
would require us to secure licenses or waivers in order to manufacture, use, sell or import our
NMP22 Test Kit product. We believe that our NMP22 Test Kit does not infringe upon the proprietary
rights of third parties. However, it may be difficult or impossible to identify, prior to receipt
of notice from a third party, the patent position or other intellectual property rights of the
third party, either in the United States or in foreign jurisdictions. If our NMP22 Test Kits are
found to infringe other parties proprietary rights and we are unable to come to terms with such
parties, we may be forced to modify the NMP22 Test Kits to make them non-infringing or to cease
production of such products altogether.
The operations of our German subsidiary involve currency exchange rate variability and other
risks that could negatively affect our results of operations.
Historically, our German subsidiary has accounted for a large portion of our product sales.
Accounts of our German subsidiary are maintained in euros and are translated into U.S. dollars. To
the extent that foreign currency exchange rates fluctuate, we may be exposed to significant
financial variability, both favorable and unfavorable.
In addition, although we have integrated the operations of our German subsidiary since we
acquired it in June 2000, we still must coordinate geographically separate organizations, manage
personnel with disparate business backgrounds and conduct business in a different regulatory and
corporate culture. It remains to be seen whether the use of this subsidiary to spearhead the
marketing effort of our products in Europe outside of Germany will be successful in the long term.
We compete with other methods of diagnosing cancer that already exist or may be successfully
developed by others and our products may not prevail as the method of choice.
Although we are not aware of any other company selling FDA-approved diagnostic or therapeutic
products that incorporate nuclear matrix protein technology, competition in the development and
marketing of cancer diagnostics and therapeutics, using a variety of technologies, is intense.
Many pharmaceutical companies, biotechnology companies, public and private universities and
research organizations actively engage in the research and development of cancer diagnostic
products. Many of these organizations have greater financial, manufacturing, marketing and human
resources than we do.
We expect that our current and future products will compete with existing FDA-approved tests,
such UroVysion, which has been approved for both monitoring and diagnosing bladder cancer, and BTA
Stat, which is a point-of-care test that has been approved for use in monitoring bladder cancer
patients; a test known as CEA, which is used primarily for monitoring colorectal and breast
cancers; a test known as CA19.9, which is used primarily for monitoring colorectal and gastric
cancers; a test known as PSA, which is used primarily for monitoring and screening prostate cancer;
tests known as TRUQUANT
®
BR RIA, CA15.3 and CA27.29, which are used for monitoring breast cancer;
and cervical specimen collection and analysis systems known as Imaging-Directed CytologyTM (Cytyc)
and FocalPointTM slide profiler (TriPath Imaging). We are also aware of a number of companies that
are developing cancer diagnostic products based upon gene technology such as OncoType Dx. Our
diagnostic products will also compete with more invasive or expensive procedures such as minimally
invasive surgery, bone scans, magnetic resonance imaging and other in vivo imaging techniques. In
addition, other companies may introduce competing diagnostic products based on alternative
technologies that may adversely affect our competitive position. As a result, our products may
become less competitive, obsolete or non-competitive.
Low reimbursement rates could limit the per-unit 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.
Our ability to sell our products depends in part on sufficient levels of payment from insurers
and/or patients to enable us and our customers (both physicians and laboratories) to make an
adequate profit. Third-party reimbursement policies, patient attitudes and abilities to pay for
some or all of their healthcare, national healthcare cost control measures and physician or
hospital preferences may each influence per-unit revenues for our products, usually in different
ways in different countries.
In most countries, third party reimbursement is the most important factor in achieving
adequate per-unit pricing. Typically, a necessarybut not sufficientcondition for obtaining third
party reimbursement is an approval from the relevant jurisdictions healthcare product regulatory
authorities (such as the FDA in the United States). However, approvals by these authorities
typically do not compel reimbursement by medical insurers, do not establish a reimbursement price
and do not set forth the specific medical
52
circumstances required to be satisfied in order to
qualify for reimbursement. These are typically the province of the health care plans, whether
private or public. Further, initial approval by a health care plan does not ensure continued
reimbursement or stable prices. At a later date some insurers may decide not to continue
reimbursement at all, not to continue reimbursement for some medical applications and/or to
decrease the reimbursement amount. Low reimbursement, no reimbursement or reimbursement that
requires a patient to pay a significant portion of the cost could have a material adverse impact on
our potential revenues.
In the United States, broad scale reimbursement (including both national healthcare plans such
as Medicare and most private insurers) has removed financial barriers for a substantial majority of
all potential patients. This has created an opportunity for our physician customers to sell
diagnostic services based on our products to most of their patients being evaluated for bladder
cancer. If Medicare or these private insurers were to lower reimbursement rates, we believe our
revenues would fall in part because physicians might have decreased interest in using our products.
To date, in Germany, where the national reimbursement bodies have not approved reimbursement
for our products, much of our sales revenue to physicians results from patients paying for our
products themselves. This lack of reimbursement may have limited the number of potential patients
for our products. On the other hand, our product sales may have benefited because there are no
restrictions on the amounts that physicians are able to charge and physicians are not restricted to
order the test only in those medical circumstances contained in a reimbursement policy. If the
national reimbursement bodies were to designate our products as reimbursable, and did so at a low
rate or for very limited clinical indications, it might decrease the prices we could charge, lower
the volume of tests that may be ordered and, in general, decrease the interest of physicians in
using our products. Reimbursement designation, however, could enable a far greater number of
patients to be tested with our products, which would partially offset such per-unit revenue
decline. Reimbursement decisions can also be affected by national policies designed to control
healthcare costs. These policies can limit prices paid for tests or limit the circumstances in
which public and private insurers will reimburse the cost of tests. For example, Medicare has
frozen reimbursement for clinical laboratory tests at 2003 levels and future changes could impose
limitations on the prices our physician and laboratory customers can charge for the services based
on our products. The future announcement or adoption of such proposals could reduce the
profitability of our business.
We expect that reimbursement approval will be obtained in some other countries where our
products are sold, but do not believe reimbursement rates in all countries will be as favorable as
in the United States. Broad scale reimbursement approval for our NMP22 BladderChek Test has not
yet occurred in the principal countries of Asia (except in Japan) or in the principal countries of
Europe (including Germany).
Even with apparently attractive reimbursement levels, the attitudes of physicians, hospitals,
laboratories, clinics and other customers may limit our per-product revenue because their profit
expectations may influence their use of our products and their attitudes toward the price we charge
them. To the extent that we are unable to price our products to achieve physician or laboratory
profit expectations, sales of our products may suffer.
We and our distributors are subject to extensive government regulation that adds to the cost
and complexity of our business, may result in unexpected delays and difficulties, may impose severe
penalties for violations and may prevent the ultimate sale or distribution of our products in
certain countries.
The FDA and many foreign governments stringently regulate the medical devices that we
manufacture and that we and our distributors market to physicians or other customers. The FDA
regulates the clinical testing, manufacture, labeling, distribution and promotion of medical
devices in the United States and agencies in the European Union, Japan and other countries where we
sell our products have their own regulations. If our products do not receive appropriate approvals
from medical device regulatory authorities in any country, we cannot sell our products in that
country, either on our own or through distributors.
Any products that we or our suppliers manufacture or distribute in accordance with FDA
approvals are subject to stringent regulation by the FDA, including:
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keeping records and reporting adverse experiences with the use of those devices;
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registering our establishments and listing our devices with the FDA and submitting
these manufacturing establishments to periodic inspections by the FDA and certain state
agencies; and
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requiring our products to be manufactured in accordance with complex regulations
known as Quality System Regulations, which include procedural and documentation
requirements for manufacturing and quality assurance activities.
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If we fail to comply with any FDA requirement, we may face a number of costly and/or time
consuming enforcement actions, including:
53
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fines;
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injunctions;
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civil penalties;
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recall or seizure of products;
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total or partial suspension of production;
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delay or refusal of the agency to grant premarket clearance or premarket approval for
other devices in our development pipeline;
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withdrawal of marketing approvals; and
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criminal prosecution.
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The FDA and foreign governmental agencies have the authority to request the repair,
replacement or refund of the cost of any device that we manufacture or distribute if it is
non-compliant. Failure to comply with medical device and quality regulations in countries outside
the United States where we sell our products can result in fines, penalties, seizure or return of
products and the inability to sell the product in those countries either on our own or through our
distributors.
Labeling and promotional activities are subject to scrutiny in the United States by the FDA
and, in certain instances, by the Federal Trade Commission, and by regulatory bodies in most
countries outside the United States where we sell products. For example, our NMP22 Test Kit has
received FDA approval and may be promoted by us only as an aid in the management of patients with
bladder cancer or as a diagnostic aid for use for previously undiagnosed individuals who have
symptoms of or are at risk for bladder cancer. The FDA actively enforces regulations prohibiting
the promotion of devices for unapproved uses and the promotion of devices for which premarket
approval or clearance has not been obtained. In order to permit Inverness, our distributor, to
sell our NMP22 BladderChek Test in the non-prescription, over-the-counter market in the U.S., we
will have to conduct clinical trials, make an additional submission to the FDA and secure FDA
approval. There is no guarantee that clinical trials we conduct will support a non-prescription,
over-the-counter use of the NMP22 BladderChek Test, that we will be able to secure FDA approval for
sale in that market or that Inverness will ever commence sale of our NMP22 BladderChek Test in that
market.
In addition to federal regulations regarding manufacture and promotion of medical devices, we
are also subject to a number of state laws and regulations that may hinder our ability to market
our products in those states or localities. Manufacturers in general are also subject to numerous
federal, state and local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. We may be required to incur significant costs to comply with these laws and
regulations in the future, which could increase future losses or reduce future profitability.
Our inability to develop and commercialize additional products may limit the future prospects
for our business, sales and profits.
We believe that our ability to achieve profitability and to increase profits will be affected
by our progress in producing additional revenue-generating products and technologies. Other than
our NMP22 products and the allergy and other diagnostic products distributed by our German
subsidiary, none of our technologies has been commercialized or is close enough to
commercialization to be expected to generate revenue in the foreseeable future, if at all. In
September 2007, we and Sysmex Corporation terminated the Exclusive License and Exclusive Supply
Agreement under which Sysmex had licensed our NMP179
®
technology for cervical cancer detection. We
currently
have no further plans to license or commercialize our NMP179 technology. In October 2007, we
announced that we have terminated most of our research and development staff and are no longer
pursuing further development or submission on any of our research and development programs. If we
are unable to successfully develop and commercialize other products or technologies, the prospects
for our business, sales and profits will be materially limited. In addition, if we are unable to
develop and commercialize additional products to diversify our revenue streams, great reliance will
be placed on the success of our few existing products.
We may encounter insurmountable obstacles or incur substantially greater costs and delays than
anticipated in the development process.
From time to time, we have experienced setbacks and delays in our research and development
efforts and may encounter further obstacles in the course of the development of additional
technologies, products and services. We may not be able to overcome these obstacles or may have to
expend significant additional funds and time. For example, in 1997, we elected to
54
terminate
development of a blood-based test for PC1, a candidate marker for prostate cancer, due to
unexpected difficulties. Despite encouraging initial results from an earlier low throughput
research testing method, we were unable to develop a kit for use in testing prostate cancer
patients even when we employed 1997 state-of-the-art detection methods. We have subsequently
announced that a different set of proteins (NMP48), discovered using a different discovery method,
are the primary candidates in our prostate cancer program. More recently, we and others have
observed that the testing results of a low throughput research mass spectrometry instrument are not
readily reproducible or transferable to high throughput mass spectrometry instruments. As a
result, the preliminary positive results our scientists have achieved using monoclonal antibody
based immunoassays and reverse transcriptase polymerase chain reaction have caused us to direct our
product development resources to these methods for the past two years. If we fail to develop
clinical tests based upon any of these methods, we may be forced to curtail or abandon these
programs and others that share the same characteristics or approach. In 2006, we reported that the
sensitivity and specificity of the breast cancer tests we had in development were not sufficient to
begin clinical trials for submission to the FDA and that we were proceeding with testing of
additional antibody pairs, including some focused on different targets. Technical obstacles and
challenges we encounter in our research and development process may result in delays in or
abandonment of product commercialization, may substantially increase the costs of development, and
may negatively affect our results of operations.
We often face challenges in replicating the research results we obtain in our laboratories in
clinical trials and, as a result, we may have difficulty commercializing our products.
Investors should not expect products that we commercialize to perform as well in large-scale
clinical trials as preliminary discovery research results in the small numbers of samples reported
by us may suggest. In large-scale clinical trials, such as those required by the FDA, we expect to
encounter greater variability and risks including but not limited to:
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obtaining acceptable specimens from patients and healthy individuals;
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testing a much larger population of individuals than we tested in early discovery,
which will be likely to include more biologic variability;
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preparation methods for the specimens using lower cost, high-throughput procedures,
which might result in performance different from those used in early discovery; and
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inability to develop economic and reproducible test methods for the substance to be
measured.
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We believe that testing our final products in a clinical setting may yield less accurate
product performance than the performance reported during the discovery phase. Unfavorable, or less
favorable, results in clinical trials may make commercializing our products more difficult.
Successful technical development of our products does not guarantee successful
commercialization.
We may successfully complete technical development for one or all of our product development
programs, but still fail to develop a commercially successful product for a number of reasons,
including the following:
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failure to obtain the required regulatory approvals for their use;
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prohibitive production costs;
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clinical trial results might differ from discovery-phase data; and
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variation of perceived clinical value of products from physician to physician.
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Our success in the market for the diagnostic products we develop will also depend greatly on
our ability to educate physicians, patients, insurers and distributors on the medical benefits of
our new products. Even if we successfully educate the market, competing products may prevent us
from gaining wide market acceptance of our products.
If we do not adequately protect our intellectual property, we could lose our ability to
compete in the marketplace.
Protection of our intellectual property is necessary for the success of our products and
business. Patent protection can be limited and not all intellectual property is or can be
protected by patent. We rely on a combination of patent, trade secret and trademark laws,
nondisclosure and other contractual provisions and technical measures to protect our proprietary
rights in our current and planned products. We have little protection when we must rely on trade
secrets and nondisclosure agreements. Our competitors may independently develop technologies and
products that are substantially equivalent or superior to our technology
55
and products. If our
competitors develop superior or competing technology and are able to produce products similar to or
better than ours, our revenues could decrease.
While we have obtained patents where advisable, patent law relating to the scope of certain
claims in the biotechnology field is still evolving. In some instances, we have taken an
aggressive position in seeking patent protection for our inventions and, in those cases, the degree
of future protection for our proprietary rights is uncertain. In addition, the laws of certain
countries in which our products are, or may be, licensed or sold do not protect our products and
intellectual property rights to the same extent as the laws of the United States.
If we are unable to recruit and retain key management, scientific and sales personnel, our
business would be negatively affected.
For our business to be successful, we need to attract and retain highly qualified scientific,
sales and management personnel. As of September 30, 2007, we employed fewer than 70 employees.
The loss of key members of our scientific staff or a number of our sales staff within a short
period of time, and the failure to recruit the necessary additional or replacement personnel when
needed with specific qualifications and on acceptable terms, might impede our research and
development efforts and/or our direct-to-the-doctor marketing strategy. In the fall of 2007 we
implemented cost reduction measures, as a result of which we have selectively curtailed
expenditures and decreased staff in regulatory affairs, marketing and administration. We have also
terminated most of our research and development staff. Our success is also greatly dependent on
the efforts and abilities of our management team. The simultaneous loss of multiple members of
senior management may delay achievement of our business objectives due to the time that would be
needed for replacements to be recruited and become familiar with our business. We face intense
competition for qualified personnel from other companies, research and academic institutions,
government entities and other organizations.
We may be unable to establish distributor relationships with high revenue potential in
jurisdictions where we do not have a direct sales force.
We rely primarily on distributors to market our NMP22 BladderChek Tests in territories other
than the United States and Germany. To date, our distribution arrangements in those other
territories have not produced sales levels or sales growth consistent with the progress achieved by
our own direct-to-the-doctor sales forces operating in the United States and Germany. We have
limited experience in selecting and managing distributors and do not know whether our existing
distributors or others we may engage in the future will achieve substantial sales levels of our
products in the near term or at all. Failure to establish successful product distribution could
severely limit the growth potential for our products, and our revenue and results of operation
could be negatively affected.
If we are sued on the basis of product-related claims, the cost of defending those claims
could be prohibitive.
The testing, marketing and sale of human healthcare products entail an inherent exposure to
product liability claims. Third parties may successfully assert product liability claims against
us. Although we currently have insurance covering product liability claims, we may not be able to
maintain this insurance at acceptable cost in the future, if at all. In addition, our insurance
may not be sufficient to cover particularly large claims. Significant product liability claims
could result in large and unexpected expenses as well as a costly distraction of management
resources, potential negative publicity and reduced demand for our products.
If the products we distribute that are made by other companies become unavailable or do not
meet quality standards, we may lose revenues and may face liability claims.
If the products we distribute, but do not manufacture, become unavailable for any reason or
fail to meet our quality standards, we would need to seek alternative sources of supply. If we are
unable to find alternative sources of an equivalent product, we may be required to cease
distribution of those products affected by this supply issue, which could cause revenues to
decrease or to be lost permanently. Furthermore, if products that we distribute, but do not
manufacture, should be found defective, we could be sued on the basis of product liability or other
claims.
Our activities involve the use of hazardous materials, and we may be held liable for any
accidental injury from these hazardous materials.
Our research and development and assembly activities involve the use of hazardous materials,
including carcinogenic compounds. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by federal, state and
local laws and regulations, we cannot completely eliminate the risk of accidental contamination or
injury from these materials. In the event of an accident or exposure, we could be held liable for
resulting damages, and significant and unexpected costs, as well as costs related to increased
insurance premiums or even the inability to obtain adequate insurance at a reasonable price, could
result. We might also face costs associated with loss of operations during any
56
required clean-up.
Any costs or liabilities resulting from our use of hazardous materials may negatively impact our
financial condition and results of operations.
Item 6. Exhibits.
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Exhibit No:
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Description
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3.1
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Amended and Restated By-Laws of the Company (filed as Exhibit
3.1 to our Current Report on Form 8-K on October 12, 2007 and
incorporated herein by reference)
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4.1
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Agreement and Amendment to 15% Secured Convertible Promissory
Notes dated January 13, 2006 and Series B 15% Secured
Convertible Promissory Notes dated January 22, 2007 (filed as
Exhibit 4.1 to our Current Report on Form 8-K on August 2,
2007 and incorporated herein by reference)
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4.2
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Form of Purchase and Sale Agreement dated July 31, 2007 by and
between Matritech, Inc. and holders of warrants originally
issued March 31, 2003 (filed as Exhibit 4.2 to our Current
Report on Form 8-K on August 2, 2007 and incorporated herein
by reference)
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4.3
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Consent of Majority Holders of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.1 to our Current Report on Form 8-K on
August 10, 2007 and incorporated herein by reference)
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4.4
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Amendment to Certificate of Designations, Preferences and
Rights of Series A Convertible Preferred Stock of Matritech,
Inc. (filed as Exhibit 4.2 to our Current Report on Form 8-K
on August 10, 2007 and incorporated herein by reference)
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4.5
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Consent of Holders of a Majority of Outstanding Principal
Value of 15% Secured Convertible Promissory Notes dated
January 13, 2006 and dated January 22, 2007 to Defer Payments
(filed as Exhibit 4.3 to our Current Report on Form 8-K on
August 10, 2007 and incorporated herein by reference)
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4.6
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Form of Consent of Holder of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and/or dated January
22, 2007 to Defer Payments (filed as Exhibit 4.2 to our
Current Report on Form 8-K on August 30, 2007 and incorporated
herein by reference)
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4.7
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Securities Purchase Agreement dated August 30, 2007, between
Matritech, Inc. and various purchasers (filed as Exhibit 4.1
to our Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
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4.8
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Form of Note dated August 30, 2007, and issued to various
purchasers of Series C Notes (filed as Exhibit 4.2 to our
Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
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4.9
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Second Amended and Restated Security Agreement dated August
30, 2007, by and between Matritech, Inc. and SDS Capital Group
SPC, Ltd. as Collateral Agent (filed as Exhibit 4.3 to our
Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
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4.10
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Second Amended and Restated Contingent License Agreement dated
August 30, 2007, by and between Matritech, Inc. and SDS
Capital Group SPC, Ltd. as Collateral Agent (filed as Exhibit
4.4 to our Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
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4.11
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Consent of Majority Holders of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.5 to our Current Report on Form 8-K on
September 4, 2007 and incorporated herein by reference)
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4.12
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Agreement and Amendment of Certain Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.6 to our Current Report on Form 8-K on
September 4, 2007 and incorporated herein by reference)
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10.1
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Asset Purchase Agreement, dated August 27, 2007, by and among
Matritech, Inc., Inverness Medical Innovations, Inc. and
Milano Acquisition Corp. (filed as Exhibit 10.1 to our Current
Report on Form 8-K on August 28, 2007 and incorporated herein
by reference)
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10.2
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Termination Agreement by and between Sysmex Corporation and
Matritech, Inc. dated September 28, 2007 (filed as Exhibit
10.1 to our Current Report on Form 8-K on October 2, 2007 and
incorporated herein by reference)
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10.3 #
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Amended and Restated Change of Control Agreement, by and
between the Company and Stephen D. Chubb, dated October 5,
2007 (filed as Exhibit 10.1 to our Current Report on Form 8-K
on October 12, 2007 and incorporated herein by reference)
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|
|
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10.4 #
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Amended Non-Disclosure and Inventions Agreement, by and
between the Company and Stephen D. Chubb, dated October 5,
2007 (filed as Exhibit 10.2 to our Current Report on Form 8-K
on October 12, 2007 and incorporated herein by reference)
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57
|
|
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Exhibit No:
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Description
|
|
|
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31.1
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|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
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|
|
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31.2
|
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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.
|
|
|
|
#
|
|
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.
|
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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|
|
|
|
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MATRITECH, INC.
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Date: November 9, 2007
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By:
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/s/ Stephen D. Chubb
|
|
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Stephen D. Chubb
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|
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Director, Chairman and Chief Executive Officer
(principal executive officer)
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|
|
|
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Date: November 9, 2007
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By:
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/s/ Richard A. Sandberg
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Richard A. Sandberg
|
|
|
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Director, Vice President, Chief Financial
Officer and Treasurer
(principal accounting and financial officer)
|
|
59
EXHIBIT INDEX
|
|
|
Exhibit No:
|
|
Description
|
|
|
|
3.1
|
|
Amended and Restated By-Laws of the Company (filed as Exhibit
3.1 to our Current Report on Form 8-K on October 12, 2007 and
incorporated herein by reference)
|
|
|
|
4.1
|
|
Agreement and Amendment to 15% Secured Convertible Promissory
Notes dated January 13, 2006 and Series B 15% Secured
Convertible Promissory Notes dated January 22, 2007 (filed as
Exhibit 4.1 to our Current Report on Form 8-K on August 2,
2007 and incorporated herein by reference)
|
|
|
|
4.2
|
|
Form of Purchase and Sale Agreement dated July 31, 2007 by and
between Matritech, Inc. and holders of warrants originally
issued March 31, 2003 (filed as Exhibit 4.2 to our Current
Report on Form 8-K on August 2, 2007 and incorporated herein
by reference)
|
|
|
|
4.3
|
|
Consent of Majority Holders of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.1 to our Current Report on Form 8-K on
August 10, 2007 and incorporated herein by reference)
|
|
|
|
4.4
|
|
Amendment to Certificate of Designations, Preferences and
Rights of Series A Convertible Preferred Stock of Matritech,
Inc. (filed as Exhibit 4.2 to our Current Report on Form 8-K
on August 10, 2007 and incorporated herein by reference)
|
|
|
|
4.5
|
|
Consent of Holders of a Majority of Outstanding Principal
Value of 15% Secured Convertible Promissory Notes dated
January 13, 2006 and dated January 22, 2007 to Defer Payments
(filed as Exhibit 4.3 to our Current Report on Form 8-K on
August 10, 2007 and incorporated herein by reference)
|
|
|
|
4.6
|
|
Form of Consent of Holder of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and/or dated January
22, 2007 to Defer Payments (filed as Exhibit 4.2 to our
Current Report on Form 8-K on August 30, 2007 and incorporated
herein by reference)
|
|
|
|
4.7
|
|
Securities Purchase Agreement dated August 30, 2007, between
Matritech, Inc. and various purchasers (filed as Exhibit 4.1
to our Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
|
|
|
|
4.8
|
|
Form of Note dated August 30, 2007, and issued to various
purchasers of Series C Notes (filed as Exhibit 4.2 to our
Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
|
|
|
|
4.9
|
|
Second Amended and Restated Security Agreement dated August
30, 2007, by and between Matritech, Inc. and SDS Capital Group
SPC, Ltd. as Collateral Agent (filed as Exhibit 4.3 to our
Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
|
|
|
|
4.10
|
|
Second Amended and Restated Contingent License Agreement dated
August 30, 2007, by and between Matritech, Inc. and SDS
Capital Group SPC, Ltd. as Collateral Agent (filed as Exhibit
4.4 to our Current Report on Form 8-K on September 4, 2007 and
incorporated herein by reference)
|
|
|
|
4.11
|
|
Consent of Majority Holders of 15% Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.5 to our Current Report on Form 8-K on
September 4, 2007 and incorporated herein by reference)
|
|
|
|
4.12
|
|
Agreement and Amendment of Certain Secured Convertible
Promissory Notes dated January 13, 2006 and January 22, 2007
(filed as Exhibit 4.6 to our Current Report on Form 8-K on
September 4, 2007 and incorporated herein by reference)
|
|
|
|
10.1
|
|
Asset Purchase Agreement, dated August 27, 2007, by and among
Matritech, Inc., Inverness Medical Innovations, Inc. and
Milano Acquisition Corp. (filed as Exhibit 10.1 to our Current
Report on Form 8-K on August 28, 2007 and incorporated herein
by reference)
|
|
|
|
10.2
|
|
Termination Agreement by and between Sysmex Corporation and
Matritech, Inc. dated September 28, 2007 (filed as Exhibit
10.1 to our Current Report on Form 8-K on October 2, 2007 and
incorporated herein by reference)
|
|
|
|
10.3 #
|
|
Amended and Restated Change of Control Agreement, by and
between the Company and Stephen D. Chubb, dated October 5,
2007 (filed as Exhibit 10.1 to our Current Report on Form 8-K
on October 12, 2007 and incorporated herein by reference)
|
|
|
|
10.4 #
|
|
Amended Non-Disclosure and Inventions Agreement, by and
between the Company and Stephen D. Chubb, dated October 5,
2007 (filed as Exhibit 10.2 to our Current Report on Form 8-K
on October 12, 2007 and incorporated herein by reference)
|
|
|
|
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.
|
60
|
|
|
Exhibit No:
|
|
Description
|
|
|
|
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.
|
|
|
|
#
|
|
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.
|
61
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