================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _______________ to ________________. Commission File Number 0-23272 --------- NPS PHARMACEUTICALS, INC. (Exact name of Registrant as specified in its charter) Delaware 87-0439579 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 420 Chipeta Way, Salt Lake City, Utah 84108-1256 (Address of principal executive offices) (Zip Code) (801) 583-4939 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES [X] NO [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 30, 1999 ----- ---------------------------- Common Stock $.001 par value 12,669,301 ================================================================================ TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page No. ------- Item 1. Financial Statements. Balance Sheets......................................... 3 Statements of Operations............................... 4 Statements of Cash Flows............................... 5 Notes to Financial Statements.......................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................. 11 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......... 11 SIGNATURES............................................................ 12 2 Item 1. Financial Statements NPS PHARMACEUTICALS, INC. (A Development State Company) Balance Sheets June 30, December 31, Assets 1999 1998 ------------- ------------- (Unaudited) Current assets: Cash and cash equivalents $ 17,336,166 $ 23,615,225 Marketable investment securities 14,794,868 19,829,253 Accounts receivable 100,000 100,000 Prepaid expenses 93,750 156,250 ------------- ------------- Total current assets 32,324,784 43,700,728 Plant and equipment: Equipment 6,570,937 6,325,455 Leasehold improvements 3,179,326 2,885,400 ------------- ------------- 9,750,263 9,210,855 Less accumulated depreciation and amortization 5,374,228 4,804,228 ------------- ------------- Net plant and equipment 4,376,035 4,406,627 Other assets 3,267 3,267 ------------- ------------- $ 36,704,086 $ 48,110,622 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of obligations under capital leases $ 24,678 $ 26,291 Current installments of long-term debt - 8,567 Accounts payable 1,347,646 1,872,610 Accrued expenses 324,893 350,853 Deferred income 420,000 675,000 ------------- ------------- Total current liabilities 2,117,217 2,933,321 Obligations under capital leases, excluding current installments 19,940 31,517 ------------- ------------- Total liabilities 2,137,157 2,964,838 Stockholders' equity: Common stock 12,669 12,586 Additional paid-in capital 88,557,918 88,291,872 Accumulated other comprehensive income- net unrealized gain on marketable investment securities 29,907 110,352 Deficit accumulated during development stage (54,033,565) (43,269,026) ------------- ------------- Net stockholders' equity 34,566,929 45,145,784 ------------- ------------- $ 36,704,086 $ 48,110,622 ============= ============= See accompanying notes to financial statements. 3 NPS PHARMACEUTICALS, INC. (A development Stage Company) Statements of Operations (Unaudited) October 22, 1986 (inception) through Three Months Ended June 30, Six Months Ended June 30, June 30, ------------------------------ ------------------------------- 1999 1998 1999 1998 1999 ------------------------------ ------------------------------- ---------------- Revenues from research and license agreements $ 915,000 $ 887,500 $ 1,830,000 $ 1,775,000 $ 53,898,179 Operating expenses: Research and development 4,899,942 4,030,111 10,404,528 8,453,148 85,037,009 General and administrative 1,514,938 1,573,034 3,098,532 2,936,981 32,131,557 --------------- ------------- -------------- -------------- ---------------- Total operating expenses 6,414,880 5,603,145 13,503,060 11,390,129 117,168,566 --------------- ------------- -------------- -------------- ---------------- Operating loss (5,499,880) (4,715,645) (11,673,060) (9,615,129) (63,270,387) Other income (expense): Interest income 497,239 685,757 912,280 1,437,815 10,805,897 Interest expense (3,538) (4,262) (3,759) (13,180) (705,575) Other - - - - 154,265 --------------- ------------- -------------- -------------- ---------------- Total other income 493,701 681,495 908,521 1,424,635 10,254,587 --------------- ------------- -------------- -------------- ---------------- Loss before taxes (5,006,179) (4,034,150) (10,764,539) (8,190,494) (53,015,800) Income tax expense - - - - 1,017,765 --------------- ------------- -------------- -------------- ---------------- Net loss $ (5,006,179) $ (4,034,150) $ (10,764,539) $ (8,190,494) $ (54,033,565) =============== ============= ============== ============== ================ Net loss per common and common- equivalent share - basic and diluted $ (0.40) $ (0.33) $ (0.85) $ (0.67) =============== ============= ============== ============== Weighted average common and common-equivalent shares outstanding - basic and diluted 12,667,400 12,283,000 12,648,900 12,265,000 =============== ============= ============== ============== See accompanying notes to financial statements. 4 NPS PHARMACEUTICALS, INC. (A Development Stage Company) Statements of Cash Flows (Unaudited) October 22, 1986 Six Months Ended June 30, (inception) through ------------------------------ 1999 1998 June 30, 1999 -------------- ----------- ------------------- Cash flows from operating activities: Net loss $ (10,764,539) $(8,190,494) $ (54,033,565) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 570,000 520,000 6,082,804 Gain on sale of equipment (4,000) - (33,909) Issuance of stock in lieu of cash for services 105,357 70,150 1,033,061 Amortization of deferred compensation - - 766,500 Decrease (increase) in receivables - 297,024 (100,000) Decrease (increase) in prepaids and other assets 62,500 62,500 (100,617) Increase (decrease) in accounts payable and accrued expenses (550,924) 949,737 1,672,539 Increase (decrease) in deferred income (255,000) (200,000) 420,000 ------------- ----------- ------------- Net cash used in operating activities (10,836,606) (6,491,083) (44,293,187) Cash flows from investing activities: Net sale (purchase) of marketable investment securities 4,953,940 737,067 (14,764,961) Acquisition of equipment and leasehold improvements (539,408) (945,160) (9,825,838) Proceeds from sale of equipment 4,000 - 1,079,621 ------------- ----------- ------------- Net cash provided by (used in) investing activities 4,418,532 (208,093) (23,511,178) Cash flows from financing activities: Proceeds from note payable to bank - - 123,855 Proceeds from issuance of preferred stock - - 17,581,416 Proceeds from issuance of common stock 160,772 226,718 69,489,610 Proceeds from long-term debt - - 1,166,434 Principal payments on note payable to bank - - (123,855) Principal payments under capital lease obligations (13,190) (21,673) (1,433,191) Principal payments on long-term debt (8,567) (203,417) (1,363,738) Repurchase of preferred stock - - (300,000) ------------- ----------- ------------- Net cash provided by financing activities 139,015 1,628 85,140,531 ------------- ----------- ------------- Net increase (decrease) in cash and cash equivalents (6,279,059) (6,697,548) 17,336,166 Cash and cash equivalents at beginning of period 23,615,225 36,103,533 - ------------- ----------- ------------- Cash and cash equivalents at end of period $ 17,336,166 $29,405,985 $ 17,336,166 ============= =========== ============= See accompanying notes to financial statements. 5 NPS PHARMACEUTICALS, INC. (A Development Stage Company) Statements of Cash Flows (Unaudited) October 22, 1986 Six Months Ended June 30, (inception) through --------------------------- 1999 1998 June 30, 1999 ----------- ---------- ------------------- Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 3,759 $ 13,180 $ 705,575 Cash paid for taxes - - 1,017,765 Supplemental Schedule of Noncash Investing and Financing Activities: Acquisition of equipment through incurrence of capital lease obligations - - 1,477,809 Acquisition of leasehold improvements through incurrence of debt - - 197,304 Issuance of preferred stock for stock subscription receivable - - 4,000,000 Accrual of deferred offering costs - - 150,000 Change in unrealized gain on marketable investment securities, net (80,445) - 29,907 See accompanying notes to financial statements. 6 NOTES TO FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The accompanying unaudited financial statements of NPS Pharmaceuticals, Inc. ("NPS" or the "Company") reflect all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for the three-month and six-month periods ended June 30, 1999, are not necessarily indicative of the results to be expected for the full year. The financial information included herein should be read in conjunction with the Company's Form 10-K/A for 1998 which includes the audited financial statements and the notes thereto for the year ended December 31, 1998. (2) Comprehensive Loss The components of the Company's comprehensive loss are as follows: Three months ended Three months ended June 30, 1999 June 30, 1998 -------------------- -------------------- Net loss ................................. $ 5,006,179 $ 4,034,150 Change in unrealized gain on marketable investment securities, net................ 115,793 ---- ------------- ------------- Comprehensive loss........................ $ 5,121,972 $ 4,034,150 ============= ============= Six months ended Six months ended June 30, 1999 June 30, 1998 ------------------- -------------------- Net loss.................................. $ 10,764,539 $ 8,190,494 Change in unrealized gain on marketable investment securities, net................ 80,445 ---- ------------- ------------- Comprehensive loss........................ $ 10,844,984 $ 8,190,494 ============= ============= (3) Loss Per Common Share Loss per common share was the same for both the basic and diluted calculations. Common stock equivalents (stock options outstanding) of approximately 2.3 million and 2.1 million shares at June 30, 1999 and 1998, respectively, that could potentially dilute basic earnings per share in the future were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. (4) Operating Segment The Company is engaged in the discovery and development of prescription drugs and in its current state of development considers its operations to be a single reportable segment. Financial results of this reportable segment are presented in the accompanying financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THIS DOCUMENT AS WELL AS IN OUR ANNUAL REPORT ON SEC-FILED FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1998 UNDER THE HEADING "RISK FACTORS." Overview Substantially all of our resources are devoted to our research and development programs. To date, we have not completed development of any pharmaceutical product for sale. We have incurred cumulative losses through June 30, 1999 of $54.0 million, net of cumulative revenues from research and license agreements of $53.9 million. We expect to incur significant operating losses over at least the next several years as we continue our research activities and our preclinical and clinical development activities. Substantially all our revenues are derived from license fees, milestone payments, and research and development support payments from licensees and these revenues fluctuate from quarter to quarter. Accordingly, we expect that income or loss will fluctuate from quarter to quarter, that the fluctuations may be substantial, and that results from prior quarters may not be indicative of future operating results. Profitability will depend in part on our ability and the ability of our licensees, to complete product development, to obtain the required regulatory approvals, and to manufacture and market products. We cannot assure that these events will occur. Results of Operations Revenues were $915,000 for the quarter ended June 30, 1999 compared to $887,500 for the quarter ended June 30, 1998, and $1.8 million for each of the six-month periods ended on those dates. Most of our revenues for each of these periods were derived from research, development, and license agreements with SmithKline Beecham Corporation, Kirin Brewery Company, Ltd., and Amgen Inc. See "Liquidity and Capital Resources" below for further discussion of payments that may be received in the future under these agreements. Research and development expenses increased to $4.9 million for the quarter ended June 30, 1999, from $4.0 million in the comparable period of 1998, and to $10.4 million for the six-month period ended June 30, 1999, from $8.5 million in the comparable period of 1998. The increase in research and development expenses was principally due to the costs incurred in 1999 for the conduct of clinical trials for NPS 1776 which commenced in the third quarter of 1998. Development expenses will continue to increase in the future if we choose to conduct increasingly expensive later-stage clinical trials and if we start clinical trials for new product candidates. We may choose not to start certain clinical trials in order to limit such expenses and to conserve cash for future operations. Such actions could substantially delay the development and potential commercialization of our product candidates currently in development. General and administrative expenses decreased to $1.5 million for the quarter ended June 30, 1999, from $1.6 million for the quarter ended June 30, 1998, and increased to $3.1 million for the six-month period ended June 30, 1999, from $2.9 million in the comparable period of 1998. We expect that general and administrative expenses will increase only modestly in the future and then only in response to need for support of any increase in research and development activities. Interest income decreased to $497,000 for the quarter ended June 30, 1999, from $686,000 for the comparable quarter of 1998 and to $912,000 for the six- month period ended June 30, 1999, from $1.4 million in the comparable period of 1998. These decreases were primarily due to decreases in the average balances of cash, cash equivalents, and marketable investment securities. We anticipate that interest income will decrease in the future as cash is utilized for operations. 8 Liquidity and Capital Resources We have financed operations since inception primarily through collaborative research and license agreements and the private and public placement of equity securities. As of June 30, 1999, we had recognized $53.9 million of cumulative revenues from payments for research support and license fees and $88.6 million in consideration for the sale of equity securities for cash and services. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities which totaled $32.1 million at June 30, 1999. We receive quarterly research and/or development support payments under our agreements with Amgen, Kirin, and SmithKline Beecham. The payments are scheduled to aggregate $3.8 million from June 1999 through the scheduled expiration dates of the respective agreements in December, June, and October 2000. In addition, SmithKline Beecham will purchase 249,000 shares of NPS common stock on November 1, 1999, at a premium to the market price, if the research agreement with SmithKline Beecham is not terminated early. There can be no assurance that our licensees will not terminate their respective agreements with us and thereby terminate their obligations to make such support payments. We could receive future payments of up to $49.0 million in the aggregate from Amgen, Kirin, and SmithKline Beecham upon the accomplishment of specified research and/or development milestones under the respective agreements. However, we do not control the subject matter, timing, or resources applied by our licensees under their respective development programs. Thus, potential receipt of milestone payments from these licensees is largely beyond our control. Progress under these agreements is subject to risk and each of these agreements may be terminated before its scheduled expiration date by the respective licensee. We cannot assure that our licensees will make any future payments, whether as research or development milestone payments or support payments. We have entered into sponsored research and license agreements that obligate us to make research support payments to academic and/or commercial research institutions. Additional payments may be required upon the accomplishment of research milestones by the institutions, or as license fees or royalties to maintain the licenses. As of June 30, 1999, we had a total commitment of approximately $1.3 million for future research support payments. We expect to enter into additional sponsored research and license agreements in the future. As of June 30,1999, our investment in leasehold improvements, equipment, and furnishings was $4.4 million, net of accumulated depreciation and amortization. Additional equipment and facilities may be needed if we increase our internal research and development activities, a portion of which may be financed with debt or leases. We expect to maintain operations for at least the next 24 months utilizing existing capital resources, including interest earned thereon, expected research and development support payments, milestone payments, equity purchases from licensees, and our management of expenditures. A reduction in the expected amount of research and development support payments, milestone payments, or equity purchases may shorten the period during which we could maintain our operations or require us to reduce operations. Additionally, actual needs are dependent on numerous factors, including our progress toward developing and commercializing products. Furthermore, in the event we in-license or otherwise acquire a product candidate, substantial expenditures for developing and commercializing the product candidate would be required. Finally, if any licensee terminates its agreement, we might not have sufficient capital to complete the development and commercialization of a product in such licensee's respective territory. It may also become necessary to raise additional funds to support our development and commercialization programs. We are presently seeking additional funding for certain current programs through corporate collaborations and licensing agreements. We may also seek additional funding through public or private financing which could be dilutive to current shareholders. We cannot assure that additional funding will be available on acceptable terms, if at all. If adequate funds are not available, we may modify plans for some of our research and development programs. Such modifications may include: 9 terminating programs, delaying the conduct of further clinical trials; reducing research activities; and/or reduction of personnel. Any of these actions may substantially delay the development and potential commercialization of our product candidates. Year 2000 Assessment We continue to assess impact of the year 2000 on our operations and systems. We have developed assessment procedures and a plan to address identified issues. A Y2K Task Force was assembled in the beginning of 1998 to evaluate the potential impact of the so called "Year 2000 millennium bug" on our operations. Since formation, the task force has monitored the evaluation of financial, accounting, information management, scientific equipment, and building systems. To date financial, accounting, and information management systems review has been completed. Those systems which were not compliant have been replaced. We continue to assess the impact of the year 2000 on our other systems and equipment. We expect to have identified and replaced or updated all internal systems and equipment which are not year 2000 compliant before the year 2000 to the extent necessary to enable us to continue operations. We do not expect the cost of repair or replacement to be material to our operations. We are also seeking assurance from primary third-party service and goods suppliers, including financial institutions, suppliers, CROs, and other collaborative parties that they do not expect the year 2000 matter to materially impact their dealings with us. To date, we are not aware of any critical third-party suppliers that will not be able to meet our needs in order to maintain operations. We cannot assure that these third parties are using systems that are year 2000 compliant or will address any year 2000 issues in a timely fashion. Any year 2000 compliance problems of our suppliers, clinical research organizations, or our licensees could have a material adverse effect on our business, operating results, and financial condition. Certain Business Risks We are currently in the early stage of product development. NPS 1506, NPS 1776, and compounds for the treatment of HPT are the only product candidates in clinical development by us or our licensees. There is no guarantee that NPS 1506, NPS 1776, or any compound for HPT will prove to be safe or effective or that back-up or later generation compounds will be identified or taken into clinical trials or if so identified and so tested, that the compounds will be found to be safe, effective, or marketable. All of our remaining technologies are in preclinical stages and will require significant additional research and development efforts before any commercial use. Because we have granted exclusive development, commercialization, and marketing rights in the fields of HPT and osteoporosis, the success of these programs is primarily dependent upon the efforts of Amgen, Kirin, and SmithKline Beecham. Other business risks include our lack of product sales, a history of operating losses, the uncertainty of regulatory approvals, rapid technological change and competition, the uncertainty of protection of our patents and proprietary technology, our dependence on third parties for manufacturing, future capital needs and the uncertainty of additional funding, our lack of marketing capabilities, the uncertainty of third-party reimbursement, the uncertainty of in-licensing efforts, our dependence on key personnel and our ability to manage growth. A more detailed discussion of factors that could cause actual results to differ materially from those in forward-looking statements is contained in our annual report on SEC-filed Form 10-K/A for the year ended December 31, 1998, under the heading "Risk Factors." 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs, and maximize yields. The securities held in our investment portfolio are subject to interest rate risk. We employ established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We maintain an investment portfolio of various issuers, types, and maturities, which consist mainly of fixed rate financial instruments. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component in stockholders' equity. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. After a review of our marketable securities, we believe that in the event of a hypothetical ten percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the financial statements. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The Company's Annual Meeting of Stockholders was held on May 26, 1999. The stockholders approved all proposals by the vote specified below: Proposal One: To elect eight directors. - ------------ Nominees For Withheld -------- ---------- -------- Santo J. Costa............. 11,486,094 13,156 James G. Groninger......... 11,486,094 13,156 Hunter Jackson............. 11,486,094 13,156 James U. Jensen............ 11,479,502 19,748 Skip Klein................. 11,486,094 13,156 Donald E. Kuhla............ 11,447,384 51,866 Thomas N. Parks............ 11,485,894 13,356 Peter G. Tombros........... 11,485,894 13,356 Proposal Two: To approve an increase of 200,000 shares of common stock for - ------------- issuance under two of the Company's equity incentive plans, as follows: (a) 100,000 shares under the Employee Stock Purchase Plan; and (b) 100,000 shares under the Non-Employee Directors' Stock Option Plan. For Against Abstain --- ------- ------- 10,926,884 565,391 6,975 Proposal Three: To ratify the appointment of KPMG LLP as independent auditors - --------------- for the Company for the 1999 fiscal year. For Against Abstain --- ------- ------- 11,487,996 2,755 8,499 11 SIGNATURES Pursuant to the requirements 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. NPS Pharmaceuticals, Inc. Date: August 13, 1999 By: /s/ James U. Jensen --------------------------------------------- James U. Jensen, Vice President Corporate Development and Legal Affairs (Executive Officer) Date: August 13, 1999 By: /s/ Robert K. Merrell --------------------------------------------- Robert K. Merrell, Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 12