ITEM 1. BUSINESS.
OVERVIEW
Matritech, Inc. (the "Company" or "Matritech") develops, manufactures and markets innovative cancer diagnostic products based on its proprietary nuclear matrix protein ("NMP") technology. The nuclear matrix, a three dimensional protein framework within the nucleus of cells, plays a fundamental role in determining cell type by physically organizing the contents of the nucleus, including DNA. The Company has demonstrated that there are differences in the types and amounts of NMPs found in cancerous and normal tissue and believes the detection of such differences in NMPs provides important diagnostic information about cellular abnormalities, including cancer. Using its proprietary NMP technology and expertise, the Company has developed non-invasive or minimally invasive cancer diagnostic tests for bladder and colon cancer and is developing additional tests for cervical, breast and prostate cancer and a second generation colon cancer test. The Company's objective is to develop tests that will be more accurate than existing non-NMP tests and will result in lower treatment costs and a higher standard of patient care than currently available tests.
NMP22 Test Kit for Bladder Cancer. The Company's first product based on its NMP technology, the NMP22(*) Test Kit for bladder cancer, was cleared for sale in the United States by the U.S. Food and Drug Administration ("FDA") in 1996 as a prognostic indicator for the recurrence of bladder cancer. In January 2000 the FDA cleared the NMP22 Test Kit for use in testing previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer. In August 1999 the State Drug Administration in the People's Republic of China approved the NMP22 Test Kit for sale for the detection and management of bladder cancer. In May 1998 the NMP22 Test Kit for bladder cancer was approved for sale in Japan by the Japanese Ministry of Health and Welfare ("Koseisho") for use in screening previously-undiagnosed bladder cancer patients. The NMP22 Test Kit has been commercially available in Europe since 1995 and is currently being marketed in Asia and in many other countries outside the United States. The Company has retained worldwide manufacturing rights for the NMP22 Test Kit as well as certain marketing rights in the United States. The Company has entered into an exclusive distribution agreement for the NMP22 Test Kit for bladder cancer in Japan with Konica Corporation ("Konica") and has additional distribution arrangements in selected European and other countries worldwide. In March 1998 the Company and Curtin Matheson Scientific, now known as Fisher Diagnostics ("Fisher"), a division of Fisher Healthcare Company, L.L.C., entered into a co-exclusive distribution agreement for the NMP22 Test Kit for bladder cancer in the United States. In September 1999 the Company entered into a distribution agreement with General Biologicals Corporation for the distribution of NMP22 in connection with an annual screening program in Taiwan.
Test Kit for Colon Cancer. The Company has also developed a blood-based test utilizing its NMP technology for the detection and management of colon cancer patients. Blood specimens for use in generating clinical data for a premarket approval submission to the FDA have been collected and the Company believes that these specimens are sufficient to permit substantiation of a claim for the use of its colon cancer test kit for the differential diagnosis of individuals exhibiting symptoms such as rectal bleeding. The Company intends to use these specimens in its current manual format test, the NuMA(TM) Test Kit, or in validating the performance of a second generation NMP-based colon cancer test employing other colon cancer NMPs. In either case, the Company intends to conduct the specimen testing and the FDA submission in collaboration with an automated instrument or clinical laboratory partner. Consequently, the timing of an FDA submission for the Company's colon cancer test will depend upon concluding a satisfactory agreement with such a partner, if any, and upon completion of work necessary to design the test's automated format, as the Company and such partner may agree. The Company has retained worldwide manufacturing and marketing rights for its colon cancer assay.
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(*) NMP22(R) is a registered trademark and NuMA(TM), NMP-179(TM) and Matritech(TM) are trademarks of Matritech, Inc. All other trademarks, service marks or trade names used in this report are the property of their respective owners.
Cervical, Breast and Prostate Cancer Tests. The Company has also identified NMPs specific to cervical, breast and prostate cancer and is currently developing diagnostic tests based on its proprietary NMP technology for these cancers. Matritech's scientists have reported the results of pre-clinical trials of its NMP-179 Test for the identification of women with cancer or pre-cancerous conditions of the cervix. These studies, which were conducted in collaboration with several leading women's health centers in New England, confirm the accuracy of the NMP-179 antibody in identifying women at elevated risk for cervical cancer. The Company is in the process of optimizing the format and procedures relating to the test in preparation for conducting FDA clinical trials to obtain approval to market the test in the United States. Matritech scientists have detected the presence of NMP's in the blood of women with breast cancer (even at the earliest stages), which are absent in the blood of women without breast cancer, as well as those with fibroadenoma, a benign breast disease. In October 1999 the Company entered into a collaboration with Johns Hopkins University School of Medicine to develop a new prostate cancer test that has the potential to differentiate between aggressive and low-grade disease, thereby indicating the extent of treatment necessary.
Matritech was incorporated in Delaware in October 1987. The Company's facilities are located at 330 Nevada Street, Newton, Massachusetts 02460 and its telephone number is (617) 928-0820.
CANCER DIAGNOSTICS MARKET
The cancer diagnostics market is composed of several overlapping categories, each corresponding to a stage in the identification and management of the disease. The categories are screening, diagnosing, monitoring and evaluating prognosis. Screening tests and procedures, such as mammograms and Pap smears, are performed regularly on individuals who may have no evidence of ill health because the tests are effective in revealing hidden, asymptomatic disease. Screening tests do not yield a final diagnosis. An actual diagnosis of cancer is usually made after microscopic examination of a tissue biopsy. Following diagnosis, additional tests can be used to monitor the course of the disease and the patient's response to treatment. These monitoring tests may be repeated at regular intervals, often every three months, and may be continued for the life of an individual in order to detect the recurrence of cancer. In addition, diagnostic tests are also used to evaluate a patient's prognosis and to select appropriate therapy. Patients identified as having a high risk of recurrence will be monitored more closely and may receive more aggressive treatment. In the United States, cancer diagnostic assays have generally been approved by the FDA for monitoring patients with known disease and only occasionally have been approved for screening purposes.
Ideally, a cancer diagnostic assay for use in a clinical laboratory should be both sensitive and specific. Clinical sensitivity refers to the percentage of cases in which the assay correctly identifies the presence of disease. Clinical specificity refers to the percentage of cases in which the assay correctly identifies the absence of disease. Clinical sensitivity and specificity percentages reported from studies and trials of cancer diagnostic products may not be directly comparable, as results may be affected by laboratory-to-laboratory differences in specimen handling, the number of subjects studied, variability in the stages of disease present in the subject population and the demographic composition of the subject population, among other factors.
Accurate in vitro diagnostic assays can reduce the need for more invasive or expensive procedures for diagnosing and managing cancer, such as surgery, biopsy, bone scans and in vivo imaging. There are only a limited number of FDA-approved in vitro cancer diagnostic tests currently available and the relatively low clinical sensitivity and specificity of these tests have limited their clinical utility. The Company believes that these tests suffer from inherent inaccuracies because they detect substances that are only indirectly correlated with the cancer. As a consequence of low clinical sensitivity, these tests yield false negatives and many patients with cancer are not diagnosed early enough to receive effective treatment, resulting in additional costs and morbidity. Conversely, low clinical specificity yields false positives resulting in unnecessary, expensive and painful treatment of patients without malignant disease.
NMP TECHNOLOGY
The Company believes that its NMP technology permits the development of cost-effective in vitro assays that are more accurate than others currently available. The nuclear matrix, a three-dimensional protein
framework within the nucleus of cells, helps organize active genes ("DNA") in the nucleus. In this way, the nuclear matrix plays a fundamental role in determining cell type and cell function. Although the specific mechanisms of action are not yet fully understood, Matritech and independent scientists have demonstrated that there are differences in the types and amounts of NMPs found in cancerous and normal tissues and also among different types of normal cells. Independent academic investigators have also confirmed the Company's findings in papers published in scientific journals which reported NMPs specific to kidney, prostate, breast and colon cancer tissues. Certain of these NMPs were shown to be present in 100% of the cancer tissue specimens examined, but were absent in all of the normal tissue specimens. The Company has examined numerous additional cancer tissue specimens with similar results. Matritech also has demonstrated that cell death, including cell death related to early tumor development, results in the release of NMPs into bodily fluids. As a result, elevated levels of certain NMPs may be found in the bodily fluids of cancer patients. The Company is not aware of any other cancer marker, or class of markers, which exhibit this level of clinical specificity and sensitivity.
The Company uses its proprietary technology and expertise to identify, isolate and extract NMPs from cancerous and normal tissues. Following extraction, the Company's scientists characterize and sequence cancer-specific NMPs, which generally are absent, or present at low levels, in the urine, blood and cells of healthy individuals. The Company then develops proprietary antibodies to these NMPs and incorporates the antibodies into industry-standard diagnostic formats, such as blood-based immunoassays.
The Company's core NMP technology is licensed from the Massachusetts Institute of Technology ("MIT"). Under the current terms of the Company's license from MIT, the Company's worldwide license is exclusive until the expiration of all patent-rights in 2006. The Company has made additional advances in NMP technology and has filed its own patent applications for related rights protection in the United States, as well as corresponding applications and patents in selected foreign countries. To date, Matritech has been granted thirteen additional United States patents.
MATRITECH'S PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
NMP22 Test Kit for Bladder Cancer
In 1996, Matritech's NMP22 Test Kit for bladder cancer was cleared for sale in the United States by the FDA as a prognostic indicator for the recurrence of bladder cancer. The FDA's action was based upon data generated during an extensive clinical trial of the NMP22 Test Kit involving more than 1,000 subjects at 13 sites, including bladder cancer patients, patients with other cancers, patients with non-cancerous urinary conditions (such as urinary tract infections) and healthy subjects. In January 2000 the FDA cleared the expanded use of the Company's NMP22 Test Kit as an aid in identifying previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer.
In May 1998 the NMP22 Test Kit for bladder cancer was approved for sale in Japan by Koseisho for use in screening previously undiagnosed individuals. In August 1999 the NMP22 Test Kit was also approved for sale in the People's Republic of China by the State Drug Administration for the detection and management of bladder cancer. The Company is currently marketing this product in the United States through its own sales force and a distributor and in other major markets worldwide through distributors. Sales of the NMP22 Test Kit began in certain countries in Europe in 1995.
The Company believes that the use of the NMP22 Test Kit for bladder cancer enables urologists to identify and manage bladder cancer patients with less invasive and less frequent procedures, thereby potentially reducing treatment costs while maintaining a high standard of patient care. If a bladder cancer patient's NMP22 value is low (less than or equal to 10 units per milliliter) 10 or more days after surgery, there is a high probability that there will be no evidence of disease upon follow-up cystoscopic examination. Consequently, the urologist may decide to postpone the next cystoscopy in order to reduce the cost, anxiety and risk to the patient. Similarly, an NMP22 value greater than 10 units per milliliter indicates a higher risk that the follow-up cystoscopic examination will indicate a recurrence of disease, enabling the urologist to make more aggressive patient management decisions. The Company believes that when the NMP22 Test Kit is used as part of the diagnostic work-up for bladder disorders it gives physicians a valuable non-invasive tool to help
them determine whether an individual's hematuria (blood in the urine) is caused by bladder cancer or by a non-life-threatening condition. The Company believes that the NMP22 Test Kit has the potential to make a positive impact on the accurate and cost-effective detection and management of bladder cancer.
The Company has entered into distribution arrangements in the United States and selected European and other countries for the NMP22 Test Kit. In 1994 the Company entered into a distribution agreement with Konica. The Konica agreement granted exclusive distribution rights in Japan for the NMP22 Test Kit in exchange for $325,000 in licensing fees. Under the terms of its agreement with Konica, Matritech sells NMP22 Test Kits to Konica for resale in Japan at prices based on Japanese reimbursement rates. Konica has limited manufacturing rights if the Company fails to deliver required quantities of test kits. In March 1998 the Company entered into a distribution agreement with Fisher. Pursuant to this agreement, the Company retained its right to distribute the NMP22 Test Kit in the United States through its own sales force but granted Fisher an otherwise exclusive right to distribute the NMP22 Test Kit to hospitals and commercial laboratories within the United States. In September 1999 the Company entered into a distribution agreement with General Biologicals Corporation for the distribution of NMP22 in Taiwan as a part of an annual screening program for bladder cancer. The Company has retained worldwide manufacturing rights for the NMP22 Test Kit for bladder cancer.
Cervical Cancer Product (NMP-179)
Matritech's scientists have reported the results of pre-clinical trials of its NMP-179 Test for the identification of women with cancer or pre-cancerous conditions of the cervix. These studies, which were conducted in collaboration with several leading women's health centers in New England, confirm the efficacy of the NMP-179 antibody in identifying women at elevated risk for cervical cancer. The Company is in the process of optimizing the format and procedures relating to the test in preparation for conducting FDA clinical trials to obtain approval to market the test in the United States. Matritech has maintained its worldwide manufacturing and marketing rights to its cervical cancer product.
Breast Cancer Product (NMP66)
During 1998 Matritech scientists, using a mass spectrometer instrument, demonstrated the ability to detect certain breast cancer markers in the blood of cancer patients which were not present in the blood of normal individuals. In September 1999 the Company announced the results of its analysis of blood specimens from 20 women with breast cancer and 20 women thought to be free of the disease. Matritech scientists found specific proteins in the blood of all 20 breast cancer patients and by contrast, found no evidence of such proteins in any of the specimens from patients without breast cancer. In March 2000 the Company announced that its scientists detected the presence of NMP's in the blood of women with breast cancer (even at the earliest stages) but which are absent in the blood of women without breast cancer as well as those with fibroadenoma, a benign breast disease. The Company intends to conduct clinical trials to generate data required to apply for FDA approval of tests using these breast cancer markers. Matritech believes that the distinctive NMPs found in breast cancer cells and the Company's ability to detect these NMPs in blood may enable it to develop a breast cancer blood-based assay more accurate than products presently available. The Company has retained worldwide manufacturing and marketing rights for its breast cancer product under development.
Prostate Cancer Product (NMP45)
In October 1999 the Company entered into a collaboration with Alan Partin, M.D., Ph.D. of the Johns Hopkins University School of Medicine to develop a new prostate cancer test that the Company believes has the potential to differentiate between aggressive and low-grade forms of prostate cancer, thereby indicating the extent of treatment necessary. The test will measure the amount of NMP45 (also known as YL-1), a nuclear matrix protein, in a prostate cancer patient's biopsy. High levels of this protein have been found in the prostate cancer tissue of patients with aggressive forms of prostate cancer. A preliminary study by investigators of the Johns Hopkins School of Medicine found that the level of NMP45 is elevated in the majority of life-
threatening aggressive tumors and is not found in normal prostate tissue and absent or present at lower levels in indolent forms of prostate cancer, which is believed to be non life-threatening.
Test Kit for Colon Cancer (NMP32)
The Company has also developed a blood-based test utilizing its NMP technology for the detection and management of colon cancer patients. Blood specimens for use in generating clinical data for a premarket approval submission to the FDA have been collected and the Company believes that these specimens are sufficient to substantiate a claim for the use of its colon cancer test kit for the differential diagnosis of individuals exhibiting symptoms such as rectal bleeding. The Company intends to use these specimens in conjunction with its current manual format test, the NuMA Test Kit, or in validating the performance of a second generation NMP-based colon cancer test employing other colon cancer NMPs. In either case, the Company intends to conduct the specimen testing and FDA submission in collaboration with an automated instrument partner or clinical laboratory. Consequently, the timing of an FDA submission for the Company's colon cancer test will depend upon concluding a satisfactory agreement with such a partner, if any, and upon completion of work necessary to design the test's automated format, as the Company and such partner agree. The Company has retained worldwide manufacturing and marketing rights for its colon cancer test. The Company is seeking distributors and an automated instrument partner for this test.
MARKETING AND SALES
The Company has retained rights to sell all of its products in the United States. Matritech is selling its NMP22 Test Kit for bladder cancer in the United States to clinical laboratories using its own direct sales force, and in March 1998 entered into a distribution agreement with Fisher granting Fisher the co-exclusive right with Matritech to distribute the NMP22 Test Kit to hospitals and commercial laboratories within the United States. The Company currently has three full-time sales representatives. Outside the United States, the Company sells the NMP22 Test Kit through distributors.
During the year ended December 31, 1999 the Company received approximately 30% and 49% of its revenue from Konica and Fisher, respectively. During the year ended December 31, 1998, the Company received approximately 29% and 31% of its revenue from Wallac ADL and Fisher, respectively.
During the years ended December 31, 1997, 1998 and 1999, 42%, 52% and 53%, respectively, of the Company's total product sales were from the United States and 58%, 48% and 47%, respectively, were from foreign countries. Product sales revenue generated outside the United States during the years ended December 31, 1997 and 1998 was primarily from Europe. For the year ended December 31, 1999, product sales revenue generated outside of the United States was primarily from Asia. See Note 9 of Notes to Financial Statements -- "Segment and Geographic Information."
THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products will depend in part on the extent to which reimbursement for the cost of such products will be available from government health administration authorities, private health insurers and other third-party payors. The Company believes that FDA clearance of a diagnostic product facilitates third-party reimbursement, but there can be no assurance that reimbursement will be available for such products or, if available, that it will be adequate.
In the case of private insurance, the reimbursement of any medical device, whether approved, or for investigational use only or for research use, is at the sole discretion of the patient's individual carrier. The decision to reimburse can be made on a case-by-case basis (as is done for research therapies) or on a system-wide basis (such as screening mammography). Historically, the decision to reimburse for a new medical procedure is made by the carrier's medical director or review committee. This group will base their reimbursement decision on published clinical data and information by treating physicians. Even if a procedure has been approved for reimbursement, there are no assurances that the insurance carrier will continue to reimburse the procedure.
Health care reform is an area of continuing national attention and a priority of many governmental officials. Certain reform proposals, if adopted, could impose limitations on the prices the Company will be able to charge in the United States for its products or the amount of reimbursement available for the Company's products from governmental agencies or third-party payors.
MANUFACTURING AND FACILITIES
The Company currently assembles its test kits in a portion of its 22,500 square-foot facility in Newton, Massachusetts and relies on subcontractors for certain components and processes. The Company's lease is for a term of five years and expires on December 31, 2000. The annual base rent for each year of the term is $230,625. The Company is actively seeking replacement facilities of approximately equal size to its present facility. The Company has retained all manufacturing rights for its products and products under development, except for certain rights that could be granted to the Company's NMP22 Test Kit distribution partner in Japan if the Company fails to perform under its agreement with such distributor.
The Company currently relies on sole suppliers for certain key components for its NMP22 Test Kit for bladder cancer. In the event that the components from such suppliers should become unavailable for any reason, the Company would seek alternative sources of supply, which may entail making regulatory submissions and obtaining regulatory approvals from the FDA or such alternative suppliers. Although the Company attempts to maintain an adequate level of inventory to provide for these and other contingencies, should its manufacturing process be disrupted as a result of a shortage of key components or a revalidation of new components, there can be no assurance that the Company would be able to meet its commitments to customers. The Company is also subject to the FDA's Good Manufacturing Practice ("GMP") requirements. See "-- Government Regulation."
COMPETITION
Matritech is not aware of any other company using NMP technology to develop diagnostic or therapeutic products. However, competition in the development and marketing of cancer diagnostics and therapeutics, using a variety of technologies, is intense.
There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of clinical cancer diagnostic products. Many of these organizations have financial, manufacturing, marketing and human resources greater than those of the Company. Matritech expects that its diagnostic products will compete largely on the basis of clinical utility, accuracy (sensitivity and specificity), ease of use and other performance characteristics, price, patent position, as well as on the effectiveness of the Company and its marketing partners.
The Company expects that certain of its assays will compete with existing FDA-approved assays, including BTA, which is used for monitoring bladder cancer, CEA, which is used primarily for monitoring colorectal and breast cancers, PSA and PSA related markers, which are used primarily for monitoring and screening prostate cancer, and TRUQUANT BR RIA, which is used for monitoring breast cancer. Matritech is also aware of a number of companies exploring the application of oncogene technology to cancer diagnostics.
A number of companies are attempting to develop automated instruments for Pap smear analysis that would compete with the NMP-179 cervical cancer product developed by the Company. These companies are computerizing image analysis techniques to automate much of the work currently done by cytotechnologists. To date, several of these instruments have been approved by the FDA for rescreening Pap smear slides previously identified by a cytotechnologist as normal as well as the primary screening of cervical specimens.
Recently, the FDA cleared a cervical diagnostic product, HPV, for use in detecting the viral infection believed to cause cervical cancer. Although many women, especially those under 35 years of age, are infected with this virus and thus positive for HPV, most would not progress to cervical cancer. Nevertheless, the HPV test may be selected by some gynecologists and clinical pathologists to identify women at high risk of infection.
The Company's products will also compete with more invasive or expensive procedures such as surgery, bone scans, magnetic resonance imaging ("MRI") and other in vivo imaging techniques. Matritech believes that its products, if successfully commercialized, improve patient management and lower overall costs, by providing accurate information and, in some cases, by providing an alternative to these invasive or costly procedures.
Should the Company decide to develop and seek to market therapeutic products, competition will be based, among other things, on product efficacy, safety, reliability, price and patent position as well as the state of the industry and effectiveness of the Company, future marketing partners and competitors.
In addition, there can be no assurance that competing diagnostic and therapeutic products based on other technologies will not be introduced by other companies and adversely affect the competitive position of the Company.
PATENTS, LICENSES AND TRADE SECRETS
Matritech's diagnostic technology is protected by three United States patents owned by MIT and expiring in 2006, with corresponding foreign patents granted and/or patent applications pending in Canada and selected countries in Europe and Asia. One of the three United States patents was granted following a reissue proceeding before the United States Patent and Trademark Office. The NMP technology owned by MIT is licensed to Matritech worldwide in exchange for royalties payable until the expiration of underlying patent rights. MIT has licensed its patent rights to Matritech on an exclusive basis through 2006.
The protection offered by these patents extends to the detection and measurement of NMPs, or associated nucleic acids, using antibody or gene probe formats, as well as to certain assay methods exploiting NMPs. With regard to related NMP advances, Matritech has filed additional United States patent applications and, in certain circumstances, foreign counterparts in one or more countries including Australia, Canada and selected countries in Europe and Asia. The Company currently has thirteen additional United States patents and six applications on file in the United States on these disclosures. Certain United States patents provide additional protection for Matritech's NMP22 Test Kit for bladder cancer until 2015. The Company intends to file additional patent applications in the future. The Company believes that any patents that may issue from its applications will provide competitive protection for its products after expiration of its license from MIT. The Company also intends to rely on its unpatented proprietary information to maintain and develop its commercial position.
GOVERNMENT REGULATION
Diagnostic Products
The medical devices to be marketed and manufactured by the Company are subject to extensive regulation by the FDA, and, in some instances, by foreign governments. Pursuant to the Federal Food, Drug and Cosmetic Act of 1976, as amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the clinical testing, manufacturing, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by the Company.
In the United States, medical devices and diagnostics are classified into one of three classes (class I, II, or III) on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Under FDA regulations, class I devices are subject to general controls (for example, labeling, premarket notification and adherence to GMPs) and class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, class III devices are those which must receive premarket approval ("PMA") by the FDA to
ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer must generally obtain marketing clearance through the filing of either a 510(k) notification or a PMA. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed class I or II medical device, or to a class III medical device for which the FDA has not called for a PMA. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information or data is needed before a substantial equivalence determination can be made. A request for additional data may require that clinical studies of the safety and efficacy of the device be performed.
Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues an order finding the device to be "substantially equivalent" to a predicate device. It generally takes from four to twelve months from submission to obtain a 510(k) clearance, but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information is needed before a substantial equivalence determination can be made.
A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence which typically includes clinical trial data to demonstrate safety and the effectiveness of the device. The PMA application must also contain the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device, as well as proposed labeling.
Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. An FDA review of a PMA application generally takes one to two years from the date the PMA application is accepted for filing, but may take significantly longer. The review time is often significantly extended as a result of the FDA requiring more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians and/or other appropriate experts in the relevant fields, will likely be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendations of the advisory committee but generally follows them. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions which must be met in order to secure final approval for sale of the device. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluations of the PMA application or manufacturing facilities are not favorable, the FDA will deny approval of the PMA application or issue a "not approvable letter." The FDA may also determine that additional clinical trials are necessary, in which case a PMA may be substantially delayed while additional clinical trials are conducted and submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.
Once a device has successfully completed the PMA process, modifications to the device, its labeling, or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.
Although clinical investigations of most devices are subject to the investigational device exemption ("IDE") requirements, clinical investigations of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements, including FDA approval of investigations, provided the testing is non-invasive, does not require an invasive sampling procedure that presents significant risk, does not introduce energy into a subject, and the tests are not used as a diagnostic procedure without confirmation of the diagnosis by another medically established diagnostic product or procedure. IVD manufacturers must also establish distribution controls to assure that IVDs distributed for the purposes of conducting clinical investigations are used only for that purpose. Pursuant to current FDA policy, manufacturers of IVDs labeled for investigational use only ("IUO") or research use only ("RUO") are encouraged by the FDA to establish a certification program under which investigational IVDs are distributed to or utilized only by individuals, laboratories, or health care facilities that have provided the manufacturer with a written certification of compliance indicating that (1) the device will be used for investigational or research purposes only, and (2) results will not be used for diagnostic purposes without confirmation of the diagnosis under another medically established diagnostic device or procedure. In addition, the certification program requirements for IUO products should include assurances that all investigations or studies will be conducted with approval from an institutional review board ("IRB"), using an IRB-approved study protocol and patient informed consent and that the device will be labeled in accordance with the applicable labeling regulations. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling.
In 1996 the FDA cleared Matritech's NMP22 Test Kit for bladder cancer for sale in the United States as a prognostic indicator for bladder cancer (i.e., as a predictor of bladder cancer recurrence following therapy, such as surgical excision of cancerous tissue). In January 2000 the FDA cleared the expanded use of the Company's NMP22 Test Kit for the additional use of testing previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer.
In connection with Matritech's colon cancer program, blood specimens for use in generating clinical data for a PMA submission to the FDA have been collected and the Company believes that these specimens are sufficient to substantiate the use of Matritech's colon cancer test for the differential diagnosis of individuals exhibiting symptoms such as rectal bleeding. The Company intends to use these specimens in conjunction with its current manual format test, the NuMA Test Kit, or in validating the performance of a second generation NMP-based colon cancer test employing other colon cancer NMPs. In either case, the Company intends to conduct the specimen testing and FDA submission in collaboration with an automated instrument partner or clinical laboratory. Consequently, the timing of an FDA submission for the Company's colon cancer test will depend upon concluding a satisfactory agreement with such a partner and the completion of work necessary to design the test's automated format, as the Company and such partner may agree.
Any products manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register their establishments and list their devices with the FDA, and are subject to periodic inspections by the FDA and certain state agencies. The FDC Act requires devices to be manufactured in accordance with GMP regulations which impose certain procedural and documentation requirements upon the Company with respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting the promotion of devices for unapproved uses and the promotion of devices for which premarket clearance or approval has not been obtained. Consequently, in the United States the Company cannot promote the NMP22 Test Kit for any unapproved use. Failure to comply with these requirements can result in regulatory enforcement action by the FDA that would adversely affect the Company's ability to conduct testing necessary to obtain market clearance for these products and, consequently, could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company and its products are also subject to a variety of state laws and regulations in those states or localities where its products are or will be marketed. Any applicable state or local regulations may hinder the Company's ability to market its products in those states or localities. Manufacturers 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. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations now or in the future or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business.
Foreign Sales
Export of unapproved products subject to the PMA requirements must be approved in advance by the FDA for export unless they are approved for use by the regulatory authorities in any member state of the European Union and certain other countries, in which case they may be exported to any such country without FDA approval. To obtain FDA export approval, when it is required, certain requirements must be met and information must be provided to the FDA, including, with some exceptions, documentation demonstrating that the product is approved for import into a country to which it is to be exported and safety data from animal or human studies. There can be no assurance that FDA will grant export approval when such approval is necessary, or that the countries to which the devices are to be exported will approve the devices for import. Failure on the part of the Company to obtain export approvals, when required, could significantly delay and impair the Company's ability to continue exports of its devices and could have a material adverse effect on the Company's business, financial condition or results of operations.
The introduction of the Company's developmental-stage test products in foreign markets will also subject the Company to foreign regulatory clearances which may impose additional substantial costs and burdens. International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country. Many countries also impose product standards, packaging requirements, labeling requirements and import restrictions on devices. In addition, each country has its own tariff regulations, duties and tax requirements. In Germany, where the Company began selling its NMP22 Test Kit for bladder cancer in 1995, no regulatory approval comparable to the United States PMA is required prior to public sale of diagnostic products. In May 1998 the Koseisho approved the NMP22 Test Kit for sale in Japan for use in screening previously undiagnosed patients. In August 1999 the State Drug Administration in the People's Republic of China approved the NMP22 Test Kit for sale in the People's Republic of China for the detection and management of bladder cancer.
The approval by the FDA and foreign government authorities is unpredictable and uncertain and no assurance can be given that the necessary approvals or clearances will be granted on a timely basis or at all. Delays in receipt of, or a failure to receive, such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on the business, financial condition and results of operations of the Company.
Changes in existing requirements or adoption of new requirements or policies could adversely affect the ability of the Company to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not be required to incur significant costs to comply with laws and regulations in the future or that laws or regulations will not have a material adverse effect upon the Company's business, financial condition or results of operations.
CLIA
Pursuant to the Clinical Laboratory Improvement Amendments ("CLIA"), the FDA will assign a complexity category to each new in vitro diagnostic test. This category will determine the rigor of quality control that must be followed by purchasers and users of the device and, thus, can affect purchasing decisions of laboratories and hospitals. In addition, as part of the premarket review process, manufacturers must establish that the device's quality control instructions are commensurate with CLIA quality control
requirements for that device. The review period for in vitro diagnostic tests may be extended due to these new CLIA requirements.
Other
In order for the Company to conduct preliminary studies or clinical trials at a hospital or other health care facility, the Company's research collaborators must first obtain approval from the IRB of the hospital or health care facility. In each case, a written protocol must be submitted to the IRB describing the study or trial, which is reviewed by the IRB with a view to protecting the safety and privacy of the institution's patients.
In addition to the regulatory framework for clinical trials and product approvals, the Company is subject to regulation under federal, state and local law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation.
EMPLOYEES
As of March 15, 2000, the Company had 35 full-time employees, 15 of whom were engaged in research and development. The Company's future success depends in part on its ability to recruit and retain talented and trained scientific, technical, marketing and business personnel. The Company has been successful to date in hiring and retaining such personnel, but there can be no assurance that such success will continue. None of the Company's employees is represented by a labor union, and the Company considers its relations with its employees to be excellent.
RESEARCH AND DEVELOPMENT
Matritech's future success will depend in large part on its ability to develop and bring to market new products based on its proprietary NMP technology. Accordingly, Matritech devotes substantial resources to research and development. The Company has assembled a scientific staff with a variety of complementary skills in several advanced research disciplines, including molecular biology, immunology and protein chemistry. In addition, Matritech maintains consulting and advisory relationships with a number of prominent researchers.
During 1997, 1998 and 1999 Matritech spent approximately $3.9 million, $4.0 million and $3.1 million, respectively, on research and development. Substantially all of these expenditures were related to the development of diagnostic products.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's facilities are located in Newton, Massachusetts, where the Company leases corporate headquarters, research and development and manufacturing facilities which occupy approximately 22,500 square feet. The Company's lease is for a term of five (5) years and expires on or about December 31, 2000. The annual base rent for each year of the term is $230,625. The Company is actively seeking replacement facilities of approximately equal size to its present facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any material pending legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on The Nasdaq National Market tier of The Nasdaq Stock Market ("Nasdaq National Market") under the symbol: "NMPS." The following table sets forth the range of quarterly high and low sales price information for the Common Stock as reported by the Nasdaq National Market.
As of March 15, 2000, there were approximately 360 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain any earnings to finance future growth and therefore does not anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1999, the Company issued the following securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"):
(a) Issuances of Capital Stock and Warrants
In April 1999 the Company issued and sold 3,094,965 shares of Common Stock for an aggregate selling price of approximately $4,000,000. The Company received net proceeds of approximately $3,910,000 after deducting the fees and expenses of the transaction.
In November 1999 the Company issued and sold 900,670 units, with each unit consisting of two shares of Common Stock and a warrant to purchase one share of Common Stock for an aggregate selling price of $3,602,680. The Company received net proceeds of approximately $3,546,000 after deducting the fees and expenses of the transaction. The warrants issued in this transaction may be exercised at a price of $2.20 per share.
(b) Grants and Exercises of Stock Options
From January 1, 1999 through December 31, 1999, the Company granted options to purchase an aggregate of 472,670 shares of Common Stock at exercise prices ranging from $.84 to $3.69, to its employees and directors under the Company's 1992 Stock Plan, as amended and the Company's Amended and Restated 1992 Non-Employee Director Stock Plan. None of these options were exercised as of December 31, 1999.
No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder, or, in the case of the exercise of options to purchase common stock, Rule 701 under the Securities Act or as a transaction pursuant to a compensatory benefit plan. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for each year in the five-year period ended December 31, 1999 have been derived from the Company's financial statements, which have been audited by Arthur Andersen LLP, independent public accountants. This data should be read in conjunction with the financial statements, related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Form 10-K.
- --------------- (1) Basic and diluted loss per share are the same for all periods presented. See Note 1 of Notes to Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Annual Report, other reports and communications to securityholders, as well as oral statements made by the Company's officers or agents may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, the Company's future revenues, operating income, EBITDA and the plans and objectives of management. In particular, certain statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Factors That May Affect Future Results" constitute forward-looking statements. Actual events or results may differ materially from those stated in any forward-looking statement. Factors that may cause such differences are discussed below and in the Company's other reports filed with the Securities and Exchange Commission.
OVERVIEW
The Company was incorporated in 1987 to develop, manufacture and market innovative cancer diagnostic products based on its proprietary NMP technology. Matritech has been unprofitable since inception and
expects to incur significant operating losses for at least the next several years. For the period from inception to December 31, 1999, the Company incurred a cumulative net loss of approximately $47.3 million.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Product sales and collaborative research and development revenue decreased to $623,000 for the year ended December 31, 1999 from $968,000 for the year ended December 31, 1998. Revenue from product sales decreased to $623,000 for the year ended December 31, 1999 from $895,000 for the year ended December 31, 1998 due primarily to domestic and European distributor inventory balances being built up in 1998 (eliminating the need for additional shipments in 1999) and the timing of domestic distributor inventory purchases. Both of these factors led to a decrease in the number of units sold to distributors in 1999. The decrease is also due to a lesser extent to a lower average unit sales price in 1999. The emergence of product sales arising from new partner-based distribution in Japan in 1999 helped to offset the reduction. In addition, collaborative research and development revenue decreased $73,000 as the SBIR funding for the Company's NuMA tumor marker project was fulfilled in 1998. There was no SBIR funding in 1999.
Interest and other income was $225,000 for the year ended December 31, 1999 and $458,000 for the year ended December 31, 1998. The decrease was due to lower average cash balances available for investment in 1999 as compared to 1998.
Research and development expenses decreased to $3,147,000 for the year ended December 31, 1999 from $4,010,000 for 1998. The decrease was primarily due to a $454,000 reduction derived through decreased headcount and a related $167,000 reduction in supplies usage under cost-reduction programs and a decision to focus resources to selected projects.
Selling, general and administrative expenses decreased to $3,825,000 for the year ended December 31, 1999 from $4,951,000 for the year ended December 31, 1998. The decrease was primarily due to a $333,000 reduction in promotional materials in 1998 not incurred in 1999, a $246,000 reduction derived through decreased headcount under cost-reduction programs, and a $70,000 reduction in outside marketing and administrative consultants.
The Company incurred a net loss of $6,124,000 for the year ended December 31, 1999 as compared with a net loss of $7,536,000 for the year ended December 31, 1998. The decreased loss was primarily due to the savings in both research and development and selling, general and administrative expenses partially offset by the decreased revenue.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Product sales, collaborative research and development revenue and license fees increased to $968,000 for the year ended December 31, 1998 from $748,000 for the year ended December 31, 1997. Revenue from product sales increased to $895,000 for the year ended December 31, 1998 from $602,000 for the year ended December 31, 1997 due primarily to increased sales of the NMP22 Test Kit for bladder cancer in the United States and Europe. Product revenue may fluctuate from quarter to quarter and from year to year based on the timing of distributors' orders for the NMP22 Test Kits for bladder cancer. Matritech also received $73,000 in SBIR funding during the year ended December 31, 1998 for its NuMA Tumor Marker project and $6,000 in SBIR funding for its cancer therapy development project during the year ended December 31, 1997. In addition, Matritech recorded $140,000 in revenue from collaborative research and development for the year ended December 31, 1997, consisting of a milestone payment associated with a development agreement with Bayer Corporation.
Interest and other income was $458,000 for the year ended December 31, 1998 and $567,000 for the year ended December 31, 1997. The decrease was due to lower average cash balances available for investment in 1998 as compared to 1997.
Research and development expenses increased slightly to $4,010,000 for the year ended December 31, 1998 from $3,943,000 for 1997. The increase was primarily due to increased staffing of clinical affairs personnel to manage the Company's colon cancer FDA submission and the NMP22 screening trial and related site management costs.
Selling, general and administrative expenses increased to $4,951,000 for the year ended December 31, 1998 from $4,846,000 for the year ended December 31, 1997. The increase was due to the augmentation of the sales force for the NMP22 Test Kit for bladder cancer and increased public relations and media relations consulting fees. In April 1997 the Company issued a warrant to a public relations consultant. The Company expensed the value of the warrant, $500,000, ratably over the one year term of its agreement with such consultant. The Company expensed $150,000 and $350,000 of the value of this warrant during the years ended December 31, 1998 and 1997, respectively.
The Company incurred a net loss of $7,536,000 for the year ended December 31, 1998 as compared with a net loss of $7,475,000 for the year ended December 31, 1997. The increased loss resulted primarily from increased sales and marketing expenses for the NMP22 Test Kit, consulting fees, and to a lesser extent, increased clinical affairs costs associated with the colon cancer project.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through private and public offerings of its securities and through funded development and marketing agreements. At December 31, 1999, the Company had cash and cash equivalents of $5,612,000 and working capital of $5,341,000. The Company's primary cash infusion in 1999 was from private sales of common stock in April 1999 and private sales of common stock and warrants to purchase common stock in November 1999 which totaled $7,456,000.
The Company's operating activities used cash of approximately $5,941,000, $6,901,000 and $6,486,000 for the years ended December 31, 1999, 1998 and 1997, respectively, primarily to fund the Company's operating loss.
The Company's investing activities used cash of approximately $34,000, $56,000 and $516,000 in the years ended December 31, 1999, 1998 and 1997, respectively, primarily for property and equipment and certain intangible assets. The Company currently estimates that capital expenditures during the year ending December 31, 2000 will not be significant.
Financing activities provided cash of approximately $7,440,000, $36,000 and $11,299,000 in the years ended December 31, 1999, 1998 and 1997, respectively, primarily from the sale of equity securities, the exercise of stock options and warrants and proceeds from a capital equipment loan in 1997, net of payments on the note payable.
In 1997 the Company entered into an equipment line of credit with Phoenix Leasing, Incorporated under which it could borrow up to $1,200,000 for equipment purchases. The equipment line of credit expired and was converted into a term note on October 20, 1997 totaling $286,000. The term note is payable over 48 months and is secured by the underlying equipment. The term note bears interest at 11.75% and has an outstanding balance of $140,432 at December 31, 1999.
The Company expects to incur continued research and development expenses and other costs, including costs related to clinical studies to commercialize additional products based upon its NMP technology. The Company will require substantial additional funds to fund operations, complete new product development, conduct clinical trials and manufacture and market its products.
The Company's future capital requirements will depend on many factors, including, but not limited to: continued scientific progress in its research and development programs; the magnitude of its research and development programs; progress with clinical trials for its diagnostic products; the magnitude of product sales; the time involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; competing technological and market developments; and the ability of the Company to establish additional development and marketing arrangements to provide funding for research and development and to
conduct clinical trials, obtain regulatory approvals, and manufacture and market certain of the Company's products.
The Company is also actively seeking additional long-term funding from public and private sources including strategic collaborations and partnerships. There can be no assurance, however, that capital will be available on terms acceptable to the Company, if at all. If the Company uses equity to finance its capital needs, such a financing could result in significant dilution to existing stockholders.
As of December 31, 1999, the Company had $5,612,000 in cash and cash equivalents and $5,341,000 of working capital. The Company believes that its existing cash resources, expected cash flow from operating activities and the proceeds from the 1999 private placements will satisfy its capital needs through 2000.
To date, the Company has not experienced any Year 2000 problems including any problems related to its material supply and service vendors. Nevertheless, there can be no assurances that the Company will not experience problems resulting from any of the foregoing which could have a material adverse impact on its business, operating results and financial condition. The Company will continue to monitor all software and operating systems for compliance. At December 31, 1999 the Company has accrued $14,000 in the event any Year 2000 non-compliance should arise.
The foregoing discussion includes forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from those currently anticipated depending on a variety of factors including those discussed below. See "Factors That May Affect Future Results." The survival of the Company in the long term is dependent on its ability to generate revenue from sales of its products. There can be no assurance that, in the long term, the Company will be able to generate sufficient revenue to achieve and maintain profitability.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future financial and operational results are subject to a number of material risks and uncertainties that may affect such results or conditions, including:
Access to Capital. The Company needs to obtain additional long-term financing to continue to market its NMP22 Test Kit for bladder cancer, to conduct research and development, to conduct clinical trials and to manufacture and market its products as currently contemplated. The Company will consider various financing alternatives, including equity or debt financings and corporate partnering arrangements. There can be no assurance, however, that this financing will be available on terms acceptable to the Company, if at all. If additional financing is not available, the Company may be required to further curtail expenses or take other steps that adversely affect the Company's future performance.
History of Operating Losses and Anticipated Future Losses. The Company has incurred operating losses since its inception and does not expect to be profitable within the next several years. While the Company expects to improve operating results in future periods, there can be no assurance that the Company will achieve or maintain profitability or that its revenue will grow in the future.
Fluctuation in Operating Results. The Company's future operating results may vary significantly from quarter to quarter or from year to year depending on a number of factors including: the timing and size of orders from the Company's customers and distributors; regulatory approvals and the introduction of new products by the Company; and the market acceptance of the Company's products. The Company's current planned expense levels are based in part upon expectations as to future revenue. Consequently, profits may vary significantly from quarter to quarter or year to year based on the timing of revenue. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods.
Uncertainties Associated with Future Performance. The Company's success in the market for diagnostic products will depend, in part, on the Company's ability to: successfully develop, test, produce and market its products; obtain necessary governmental approvals in a timely manner; attract and maintain key employees; and successfully respond to technological changes in its marketplace. The Company's success in markets
outside the United States is dependent on the performance of independent distributors over which the Company has limited control.
Near-Term Dependence Upon NMP22. The Company anticipates that in the near-term it will be substantially dependent on the success of the NMP22 Test Kit for bladder cancer, which was approved for sale in the United States by the FDA in 1996 and in Japan by the Koseisho in 1998 and in the People's Republic of China by the State Drug Administration in 1999. The Company expects to generate substantially all of its near-term product sales from the sale of NMP22 Test Kits. The Company would experience a material adverse effect on its business, financial condition and results of operations if the NMP22 Test Kit does not achieve wide market acceptance. The remainder of the Company's products have not been approved by the FDA or are in development and there can be no assurance that it will be successful with such regulatory approvals and product development.
Reliance on Sole Suppliers. The Company currently relies on sole suppliers for certain key components for its NMP22 Test Kit. In the event that the components from such suppliers should become unavailable for any reason, the Company would seek alternative sources of supply, which may entail making regulatory submissions and obtaining regulatory approvals from the FDA or such alternative suppliers. Although the Company attempts to maintain an adequate level of inventory to provide for these and other contingencies, should its manufacturing process be disrupted as a result of a shortage of key components or a revalidation of new components, there can be no assurance that the Company would be able to meet its commitments to customers.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Investment Portfolio. The Company does not use derivative financial instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, and type of instrument. See Note 1 of Notes to Financial Statements -- "Operations and Significant Accounting Policies."
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial statements set forth in Item 14(a) under the caption "Financial Statements" as a part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters during the Company's two most recent fiscal years.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information concerning directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999 under the headings "Occupations of Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999 under the headings "Occupations of Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999, under the heading "Compensation and Other Information Concerning Directors and Officers."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999, under the heading "Securities Ownership of Management and Principal Stockholders."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information, if any, required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission within 120 days after the close of the Company's fiscal year ended December 31, 1999, under the heading "Certain Relationships and Related Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. Report of Independent Public Accountants. Balance Sheets as of December 31, 1998 and 1999. Statements of Operations for the Years ended December 31, 1997, 1998 and 1999. Statements of Stockholders' Equity (Deficit) for the Years ended December 31, 1997, 1998 and 1999. Statements of Cash Flows for the Years ended December 31, 1997, 1998 and 1999. Notes to Financial Statements.
2. No schedules are submitted because they are not applicable, not required or because the information is included in the Financial Statements or Notes to Financial Statements.
3. List of Exhibits.
- -------------------------------------------------------------------------------- * Confidential Treatment Granted for portions thereof
** Filed herewith
# Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K. Not Applicable.
(c) Exhibits. The Company hereby files as exhibits to this Form 10-K those exhibits listed in Item 14(a)(3), above.
(d) Financial Statement Schedules. The Company hereby files as financial statement schedules to this Form 10-K those financial statement schedules listed in Item 14(a)(2), above.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEWTON, COMMONWEALTH OF MASSACHUSETTS, ON THE 30TH DAY OF MARCH, 2000.
Matritech, Inc.
By: /s/ STEPHEN D. CHUBB ------------------------------------ Stephen D. Chubb Director, Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
MATRITECH, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Matritech, Inc.:
We have audited the accompanying balance sheets of Matritech, Inc. (a Delaware corporation) as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Matritech, Inc. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts February 9, 2000
MATRITECH, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
MATRITECH, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
MATRITECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
MATRITECH, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Matritech, Inc. (the "Company") was incorporated on October 29, 1987 to develop, produce and distribute products for the diagnosis and potential treatment of cancer based on its proprietary nuclear matrix protein technology. This technology was licensed to the Company by the Massachusetts Institute of Technology ("MIT").
The Company is devoting substantially all of its efforts toward product research and development, raising capital and marketing products. The Company is subject to risks common to companies in similar stages of development, including history of operating losses and anticipated future losses, fluctuation in operating results, uncertainties associated with future performance, near-term dependence on NMP22, reliance on sole suppliers, dependence on key individuals, competition from substitute products and larger companies, the development of commercially usable products and the need to obtain adequate additional financing necessary to fund the development of its future products.
In 1995, the Company began to sell its NMP22(R) Test Kits for bladder cancer in certain countries in Europe through distributors. In 1996, the Company received FDA approval to begin selling the NMP22 Test Kit as a prognostic indicator for use in the management of bladder cancer patients in the United States and in May 1998 the Koseisho approved the NMP22 Test Kit for sale in Japan for screening of bladder cancer patients. In March 1998 the Company and Curtin Matheson Scientific, now Fisher Diagnostics, a division of Fisher Healthcare LLC ("Fisher") entered into a co-exclusive distribution agreement for the NMP22 Test Kit for bladder cancer in the United States. In August 1999 the People's Republic of China's State Drug Administration approved the NMP22 Test Kit for the detection and management of bladder cancer. In September 1999 the Company entered into a distribution agreement with General Biologicals Corporation for the distribution of the NMP22 Test Kit in connection with an annual screening program in Taiwan.
The accompanying financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the accompanying financial statements and notes.
(a) Revenue Recognition
The Company recognizes revenue from product sales upon shipment; revenue from collaborative research and development arrangements as milestones are achieved; revenue from nonrefundable license agreements upon the signing of the agreement; and revenue from research grants as earned.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition on Financial Statements. SAB 101 will require companies to recognize certain upfront non-refundable fees and milestone payments over the life of the related alliance when such fees are received in conjunction with alliances which have multiple elements. The Company is required to adopt this new accounting principle through a cumulative charge to the statement of operations, in accordance with APB No. 20, Accounting Changes, no later than the second quarter of fiscal 2000. The Company believes that the adoption of SAB 101 will not have an impact on its future operating results.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The Company applies Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost, which approximates fair market value, and are classified as held-to-maturity. These securities include cash and cash equivalents, which consist of auction market preferred stocks, money market accounts and repurchase agreements at December 31, 1998 and 1999.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Inventories
Inventories are stated at the lower of cost or market and consist of the following:
(d) Depreciation and Amortization
The Company provides for depreciation and amortization using accelerated and straight-line methods by charges to operations in amounts that allocate the cost of property and equipment over their estimated useful lives as follows:
The Company amortizes certain intangible assets, including license fees, over their estimated useful lives of three to five years.
(e) Uses of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its investments in highly rated financial institutions and investment-grade securities. The Company has not experienced any losses on its investments to date.
The Company received revenue of greater than 10% of total collaborative research and development, license fees and product sales from the following number of customers during the following periods:
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company had accounts receivable balances greater than 10% of total accounts receivable from the following customers as of December 31, 1998 and 1999:
(g) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and note payable. The carrying amounts of the Company's financial instruments approximate the estimated fair value at December 31, 1998 and 1999. The estimated fair values have been determined through information obtained from market sources and management estimates.
(h) Research and Development
Research and development expenses in the accompanying statements of operations are expensed as incurred and include both funded and unfunded research and development expenses.
(i) Net Loss per Common Share
The Company applies SFAS No. 128, Earnings per Share, for calculating and presenting earnings per share. Basic net loss per common share was computed by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share is the same as basic loss per share as the effects of the potential common stock are antidilutive. The number of common stock potentially dilutive shares excluded from the diluted net loss per share were 1,497,176, 1,649,391 and 2,694,156 for the years ended December 31, 1997, 1998 and 1999, respectively.
(j) Postretirement Benefits
The Company has no obligations for postretirement benefits as defined by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, as it does not currently offer such benefits.
(k) Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in the annual financial statements. It also requires that an entity classify items of other comprehensive earnings (e.g., foreign currency translation adjustments and unrealized gains and losses on certain marketable securities) by their nature in an annual financial statement. The Company's total comprehensive loss was the same as the reported net loss for all periods presented.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting and their tax basis and carryforwards to the extent they are realizable. The net operating loss carryforwards and tax credits expire as follows:
The Company's net deferred tax asset consists of the following:
A full valuation allowance has been provided due to the uncertainty surrounding the realization of the deferred tax asset.
(3) LEASE COMMITMENTS
The Company leases office and laboratory facilities and certain equipment under operating leases that expire through 2002. Total commitments due in 2000, 2001 and 2002 are approximately $244,000, $3,000 and $3,000, respectively. Rent expense for the years ended December 31, 1997, 1998 and 1999 was approximately $275,000, $275,000, and $283,000, respectively.
(4) NOTE PAYABLE
In August 1997, the Company entered into an equipment line of credit under which it could borrow up to $1,200,000 for equipment purchases. This line of credit expired and in October 1997, the outstanding balance was converted into a 48 month term note. The term note has an outstanding balance of $140,432 at December 31, 1999 which is due in 2000 and 2001 and bears interest at 11.75% and is secured by the underlying equipment.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMON STOCK
(a) Sale of Common Stock
In May 1997, the Company completed a private placement of 2,200,000 shares of common stock at $5 per share resulting in proceeds of $10,904,000, net of commissions and issuance costs. In connection with the private placement, the Company issued to the placement agent 257,609 shares of common stock and a warrant to purchase 245,761 shares of common stock at $5 per share. During 1997, 5,530 of these warrants were exercised for 1,395 shares of common stock. In 1999, these warrants were repriced to $2.50 per share to more accurately reflect the level of the stock price at the repricing date. The Company recorded approximately $87,000 as a component of selling, general and administrative expenses in 1999 for the repricing.
In April 1999, the Company completed a private placement of 3,094,965 shares of its common stock at resulting in net proceeds of $3,910,000 after deducting the transaction expenses. In November 1999, the Company completed another private placement of 1,801,340 shares of common stock at $2 per share resulting in proceeds of $3,546,000 after deducting the transaction expenses. In connection with the second private placement, the Company issued to the investors warrants to purchase 900,670 shares of common stock at $2.20 per share. These warrants are exercisable over a period of two years and are callable by the Company if certain common stock price levels are reached during this two year period.
(b) Warrants
In connection with a private placement in September 1994, the Company issued a warrant to purchase 234,637 units at an exercise price equal to $2.25 per unit to the placement agent ("Placement Agent Warrants"). Each Placement Agent Warrant converts into one share of common stock and one Class B nonredeemable common stock purchase warrant. During 1996, 214,637 of the Placement Agent Warrants and 204,637 of the underlying Class B non redeemable common stock purchase warrants were exercised for net proceeds of $757,000, pursuant to which the Company issued 400,693 shares of common stock. At December 31, 1999, all outstanding warrants had expired.
In April 1997, the Company issued a warrant to a public relations consultant for the purchase of up to 150,000 shares of the Company's common stock for a price of $6.50 per share expiring in April 2002. These warrants were valued at $500,000 in accordance with SFAS No. 123 and were expensed ratably over the one-year term of the agreement. The Company expensed $150,000 and $350,000 as a component of selling, general and administrative expense on the accompanying statement of operations for the years ended December 31, 1998 and 1997, respectively. In 1999, these warrants were repriced to $2.50 per share to more accurately reflect the level of the stock price at the repricing date. An additional $72,000 was expensed as a component of selling, general and administrative expense on the accompanying statement of operations for the year ended December 31, 1999 to record compensation expense associated with the repricing.
(c) Stock Option and Purchase Plans
The Company has granted incentive and nonqualified options under its 1988 and 1992 option plans and the 1992 Directors' Plan. All option grants, prices and vesting periods are determined by the Board of Directors. Incentive stock options must be granted at a price not less than the fair market value on the date of grant.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
There are 123,939 common shares available for future grants under existing option plans at December 31, 1999. The following table summarizes stock option activity:
The Company has reserved and may issue up to an aggregate of 225,000 shares of common stock under the Employee Stock Purchase Plan pursuant to which stock is sold at 85% of fair market value, as defined. At December 31, 1998 and 1999, the Company has accumulated payroll deductions of $3,976 and $4,500, respectively, for the issuance of 2,650 shares and 3,000 shares of common stock, respectively, which are issued in the following year to employees pursuant to the plan. At December 31, 1999, 187,275 shares are available for issuance under the plan.
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock options, including stock purchase plans, or warrants granted to employees to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the pro forma disclosures required under SFAS No. 123 for options granted in 1997, 1998 and 1999 and stock issued pursuant to the stock purchase plan using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used for 1997, 1998 and 1999 are as follows:
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The total fair value of the options granted during 1997, 1998 and 1999 was computed as approximately $819,000, $504,000 and $530,000, respectively. Of these amounts, approximately $1,130,000, $1,143,000 and $1,140,000 would be charged to operations for the years ended December 31, 1997, 1998 and 1999, respectively. The remaining amount, approximately $1,438,000, would be amortized over the remaining vesting period of the underlying options. The resulting pro forma compensation expense may not be representative of the amount to be expected in future years as pro forma compensation expense may vary based upon the number of options granted.
The pro forma net loss and pro forma net loss per common share presented below have been computed assuming no tax benefit. The effect of a tax benefit has not been considered since a substantial portion of the stock options granted are incentive stock options and the Company does not anticipate a future deduction associated with the exercise of these stock options.
The pro forma effect of SFAS No. 123 for the years ended December 31, 1997, 1998 and 1999 is as follows:
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Reserved Shares
As of December 31, 1999, the following shares of common stock were reserved and available for future issuance:
(6) LICENSE AGREEMENT
(a) MIT License Agreement
MIT has granted the Company a worldwide exclusive license to certain technology, which was extended when the Company obtained FDA approval of its first cancer diagnostic product in 1996, until the expiration of all patent rights in 2006. Pursuant to the license agreement, the Company pays royalties on the sales of products incorporating the licensed technology. The Company paid $19,096, $17,776 and $6,944 in royalties in the years ended December 31, 1997, 1998, and 1999, respectively.
(b) Hybritech License Agreement
In August 1994, the Company entered into a non-exclusive license agreement with Hybritech, Inc. for the manufacture and sale of certain patented technology for immunometric assays using monoclonal antibodies. The Company is required to pay a royalty equal to the greater of 8% of net sales of licensed products or $25,000 per year until the expiration of patent rights on a country-by-country basis beginning in 2000 through 2008. The Company paid $53,863, $25,000 and $42,540 in royalties during the years ending December 31, 1997, 1998 and 1999, respectively.
(7) COLLABORATION AGREEMENTS
(a) Joint Development and Distribution with Bayer
In 1995, Matritech signed a joint development and distribution agreement with Bayer for the identification of cervical cancer-specific NMPs and the development of monoclonal antibodies which recognize malignant and pre-malignant or dysplastic cervical cancer cells. In the year ended December 31, 1997, the Company recorded revenue of $140,000. No revenue was recorded in the years ended December 31, 1998 and 1999.
In December 1997, Matritech submitted pre-clinical evaluation data to Bayer which had been providing funding for this project. After a period of discussion between the two companies Bayer elected not to proceed with the project. Bayer's option to develop and launch an automated cervical cancer instrument for use with NMP-179 has terminated and Bayer is no longer obligated to provide further funding towards the commercialization of the system.
Matritech has regained all marketing and product rights which had been granted to Bayer Corporation in the cervical cancer development and supply agreement between the two companies.
MATRITECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Yamanouchi Pharmaceutical Co., Ltd.
On November 10, 1998 the Company amended its development and supply agreement with Yamanouchi Pharmaceutical, Co., Ltd. resulting in the termination of development, supply and marketing rights. In addition, Matritech reacquired all rights under the agreement in exchange for a two-percent royalty on future product sales covered by this agreement, sold in Japan, not to exceed $2,000,000.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in the fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker or decision making group, in making decisions how to allocate resources and assess performance. The Company's chief decision maker, as defined under SFAS 131, is a combination of the Chief Executive Officer, President and the Chief Financial Officer. To date, the Company has viewed its operations and manages its business as principally one segment, the sale of cancer diagnostic products. Associated services are not significant. As a result, the financial information disclosed herein, represents all of the material financial information related to the principal operating segment.
Geographic information product sales by destination as a percentage of total product sales are as follows:
Product sales were $602,000, $895,000 and $623,000 in the years ended December 31, 1997, 1998, and 1999, respectively. All of the Company's products were shipped from its facilities located in the United States.