UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission file number: 000-50642

Memory Pharmaceuticals Corp.

(201) 802-7100

None.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

   Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

          As of August 13, 2004 the registrant had 20,443,448 shares of Common Stock, $0.001 par value per share, outstanding.

MEMORY PHARMACEUTICALS CORP.

Table of Contents

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MEMORY PHARMACEUTICALS CORP.

See accompanying notes to financial statements.

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MEMORY PHARMACEUTICALS CORP.

See accompanying notes to financial statements.

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MEMORY PHARMACEUTICALS CORP.

See accompanying notes to financial statements.

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MEMORY PHARMACEUTICALS CORP.

(1)		Basis of Presentation
		As used herein, “we,” “our,” “the Company” and similar terms refer to Memory Pharmaceuticals Corp. We are a biopharmaceutical company focused on the development of innovative drug candidates for the treatment of a broad range of central nervous system, or CNS, conditions that exhibit significant impairment of memory and other cognitive functions. These conditions include neurological diseases associated with aging, such as Alzheimer’s disease, vascular dementia and mild cognitive impairment, or MCI, and also include certain psychiatric disorders such as depression and schizophrenia.
		The financial statements included herein have been prepared from our books and records pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. The information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to these rules and regulations. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our registration statement on Form S-1, as amended (File No. 333-111474), which was declared effective by the Securities and Exchange Commission on April 5, 2004.
		We are responsible for the financial statements included in this document. Our interim financial statements are unaudited and are subject to year-end adjustments. Interim results may not be indicative of the results and trends that may be expected for the year. However, we believe all adjustments considered necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.
		Reclassification
		A reclassification relating to December 31, 2003 was made to classify certain investments previously classified as cash and cash equivalents to marketable securities on our balance sheet. Also we classified certain deferred revenue relating to our 2003 Roche Collaboration, refer to Note 9 – “License Agreements and Collaborations,” previously classified as long-term to current deferred revenue on our balance sheet.
(2)		Recent Accounting Developments
		On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed statement, Share-Based Payment, which addresses the accounting for share-based awards to employees, including employee stock purchase plans. The FASB formally proposed to require companies to recognize the fair value of stock options and other stock-based compensation to employees in their statements of operations. The proposed statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed requirements in the exposure draft would be effective for us as of the beginning of 2005. We currently account for our stock-based compensation plans in accordance with APB Opinion No. 25. Therefore, the eventual adoption of this proposed statement, if issued in final form by the FASB, could have a material effect on our financial statements.
(3)		Stock-Based Compensation
		We apply the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for our fixed-plan employee stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 and No. 148, we have elected to continue to apply the intrinsic-value based method of accounting for employee stock options described above, and have adopted only the disclosure requirements of SFAS No. 148.

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		We account for stock options and warrants granted to non-employees based on the fair value of the stock option or warrant. The factor that most affects the accounting for stock-based compensation is the fair value of our common stock at the measurement date. Prior to April 5, 2004, our common stock was not publicly traded. As a result, in valuing our common stock, stock options and warrants issued prior to this date, we considered the pricing of private equity sales, company-specific events, independent valuations, economic trends and the rights and preferences of the security being valued. Since our initial public offering, the fair value of stock-based compensation granted to non-employees has been determined using the Black-Scholes option-pricing model based on assumptions for expected stock price volatility, expected term of the option, the risk-free interest rate and expected dividend yield at the grant date.
		The following table illustrates the effect on net loss attributable to common stockholders if the fair-value based method had been applied to all outstanding and unvested awards each period. The assumptions used to value the awards are included herein. Because options granted during 2004 and 2003 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair-value based method.

The fair values of these option grants were calculated using weighted averages of assumptions for the multiple stock options granted during the three-month and six-month periods ended June 30, 2004 and 2003.

The per share weighted average fair value of stock options granted during the six months ended June 30, 2004 and 2003 was determined using the Black-Scholes option-pricing model. These assumptions resulted in weighted average fair values of $6.34 and $0.42 per share for stock options granted in the six months ended June 30, 2004 and 2003, respectively.

Stock Options

During the six months ended June 30, 2004, the Company granted an option to purchase 100,000 shares of common stock to an employee at an exercise price of $2.70 per share pursuant to the 1998 Employee, Director and Consultant Stock Option Plan. Deferred compensation expense of $1,130 attributable to the intrinsic value of the options granted was measured at the measurement date for the grant. Compensation expense is recognized ratably over the four-year vesting period. The Company recognized $106 and $303 of total compensation expense during the three-month and six-month periods ended June 30, 2004, respectively.

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(4)		Net Loss Per Share
		Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock and the dilutive potential common stock equivalents then outstanding. Potential common stock equivalents consist of stock options, warrants and redeemable convertible preferred stock.
		Since we had a net loss in each of the periods presented, basic and diluted net loss per share is the same. As a result, the computation of diluted net loss per share for the three-month and six-month periods ended June 30, 2004 excludes the effect of the potential exercise of options to purchase 3,014,971 shares of common stock and warrants to purchase 124,073 shares of common stock, because the effect would be anti-dilutive.
		Similarly, the computation of diluted net loss per share for the three-month and six-month periods ended June 30, 2003 excludes the effect of the potential exercise of options to purchase 2,261,175 shares of common stock and warrants to purchase 56,913 shares of common stock, because the effect would be anti-dilutive. In addition, the diluted weighted average number of shares outstanding for both the three-month and six-month periods ended June 30, 2003 excludes the Company’s redeemable convertible preferred stock that would have converted into 12,369,501 shares of common stock, since the effects would be anti-dilutive.
		Pro forma net loss per share is calculated using the weighted average number of shares of common stock outstanding, including the pro forma effects of the automatic conversion of all outstanding redeemable convertible preferred stock into shares of the Company’s common stock effective upon the closing of the Company’s initial public offering, as if such conversion had occurred at the date of the original issuance.
		The following table sets forth the calculation of basic and diluted net loss per share and pro forma basic and diluted net loss per share for the three-month and six-month periods ended June 30, 2004 and the same periods in 2003. The pro forma basic and diluted net loss per share gives effect to the conversion of the redeemable convertible preferred stock as if converted at the date of original issuance:

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(5)		Initial Public Offering of Common Stock
		In April 2004, we sold 5,000,000 shares of our common stock in our initial public offering at a price of $7.00 per share. We also issued an additional 750,000 shares of common stock through an over-allotment option exercised by our managing underwriters in April 2004, at $7.00 per share. After deducting underwriting discounts and expenses and estimated offering-related expenses, the initial public offering resulted in net proceeds to us of approximately $35,400. In connection with the initial public offering, all of the outstanding shares of the Company’s redeemable convertible preferred stock were automatically converted into shares of our common stock as described in Note 6 – “Redeemable Convertible Preferred Stock.”
(6)		Redeemable Convertible Preferred Stock
		Upon the closing of our initial public offering in April 2004, all of the outstanding shares of our redeemable convertible preferred stock, including accrued but unpaid dividends, were automatically converted into 13,295,427 shares of common stock. Additionally, 1,536 shares of common stock were issued upon the net share settled exercise of warrants, which occurred immediately prior to the closing of our initial public offering.
		Common stock issued upon automatic conversion is as follows:

		Accrued Dividends
		Dividends on the Series A, Series B, Series C, Series D and Series Roche redeemable convertible preferred stock accrued at an annual rate of 8%, whether or not funds were legally available or dividends were declared by the board of directors. Upon the closing of our initial public offering on April 8, 2004, all of our preferred stock converted into common stock, and all related accrued dividends in the amount of $19,539 were forfeited.
(7)		Marketable Securities
		Our marketable securities are debt securities primarily consisting of government obligations, mortgage-backed securities, and corporate debt securities. We classify all of our marketable securities as available-for-sale, as defined by Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a component of stockholders’ equity (deficit) in accumulated other comprehensive loss. As of June 30, 2004, our accumulated unrealized loss was $47 for these securities. Interest income, realized gains and losses, and declines in value judged to be other-than-temporary on securities are included in our statements of operations. Our investment in debt securities of $13,223, with maturity dates exceeding 90 days at December 31, 2003, were reclassified to marketable securities on our balance sheet.

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(8)		Comprehensive Loss
		Comprehensive loss includes net loss and unrealized gains and losses on available-for-sale marketable securities. Cumulative unrealized gains and losses on available-for-sale marketable securities are reflected as accumulated other comprehensive loss in stockholders’ equity / (deficit) on our balance sheet. For the three months ended June 30, 2004, comprehensive loss was $5,914, which includes our net loss of $5,819 with an unrealized loss on available-for-sale marketable securities of $95. For the six months ended June 30, 2004, comprehensive loss was $10,698, which includes our net loss of $10,651 with an unrealized loss on available-for-sale marketable securities of $47.
(9)		License Agreements and Collaborations
		Bayer AG
		In June 2001, we entered into an exclusive license agreement with Bayer AG (Bayer). Under the agreement, we have been granted an exclusive worldwide license to Bayer’s know-how and patents to commercialize and market a drug candidate to treat human peripheral and CNS-related disorders. As of June 30, 2004, we have paid $1,000 in upfront and milestone payments under this agreement. We are also required to make milestone payments to Bayer and pay royalties to Bayer on proceeds received by us from the sale of any products incorporating the licensed compound.
		Hoffmann-LaRoche (2002 Collaboration)
		In July 2002, we executed a Research Collaboration and License Agreement (“2002 Roche Agreement”) with F. Hoffmann-La Roche Ltd./Hoffmann-La Roche Inc., or Roche, for the development of PDE4 inhibitors for neurological and psychiatric indications, and potential other indications. Under the 2002 Roche Agreement, we granted Roche a worldwide, exclusive, sublicensable license to our patent rights and know-how with respect to any PDE4 inhibitor for the prevention and treatment of diseases, in all indications, for either human or veterinary use.
		Under the 2002 Roche Agreement, as of June 30, 2004, Roche has made an $8,000 upfront license payment and two $2,000 milestone payments. Roche will make future payments based on the achievement of specified developmental milestones. The 2002 Roche Agreement provides for Roche to pay us $1,500 for contract research and to make quarterly payments of $875 over a two-year period for research collaboration efforts.
		During the three and six month periods ended June 30, 2004, we recognized revenue of $1,287 and $2,574, respectively, under the 2002 Roche Agreement, representing $412 and $824, respectively, related to the upfront license payment and milestone payments received as of June 30, 2004, which is being amortized over the expected development period of 7.5 years from the date of the collaboration, and $875 and $1,750, respectively, related to the funding of the research collaboration. During the three and six months ended June 30, 2003, the Company recognized revenue of $1,368 and $3,091, respectively, under the 2002 Roche Agreement, representing $388 and $736, respectively, related to the upfront license payment and a milestone payment received as of June 30, 2003, which are being amortized over the expected development period, and $980 and $2,355, respectively, related to the funding of the research collaboration.
		Hoffmann-LaRoche (2003 Collaboration)
		In September 2003, the Company entered into a second collaboration agreement with Roche (“2003 Roche Agreement”). Under the 2003 Roche agreement, the Company granted Roche the right, on a compound-by-compound basis, to obtain an exclusive, worldwide, sublicensable license to the Company’s patent rights and know-how for any nicotinic alpha-7 partial agonist that the Company develops during the five years following the commencement of the collaboration. Under the 2003 Roche Agreement, Roche made a $10,000 upfront nonrefundable payment and will make future payments based on the Company achieving certain developmental milestones. Additionally, the agreement provides for Roche to make nonrefundable quarterly payments of $750 over a two-year period for research collaboration efforts.

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		During the second quarter 2004, we changed our revenue recognition approach for the upfront nonrefundable payment and the nonrefundable quarterly payments for our research collaboration efforts received under the 2003 Roche Agreement from two units of accounting to a single unit of accounting, as defined in the Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Since Roche has the right to enter into a license under our 2003 agreement, the upfront nonrefundable payment and the nonrefundable quarterly payments for research collaboration efforts are now being amortized over the five-year period following the commencement of the collaboration. During this period, we are responsible for the pre-clinical and clinical development through Phase IIa of nicotinic alpha -7 partial agonist compounds. This period also reflects the time period that Roche has the right to obtain an exclusive, sublicensable license to our patent rights and know-how for any nicotinic alpha-7 partial agonist that we develop. We will recognize revenue over the five-year period based on the level of actual research efforts expended in a period as compared to our estimated efforts over the full period. The adoption of this single unit of accounting for revenue recognition treatment under the 2003 Roche Agreement does not have a material impact on the Company’s financial position, results of operations or cash flows.
		During the three and six months ended June 30, 2004, the Company recognized revenue of $1,262 and $2,346, respectively, under the 2003 Roche Agreement.
(10)		Consulting Agreements
		In April 1998, we entered into a consulting agreement with one of the founders of the Company for an initial term of four years, with the option to automatically extend the term for additional one-year periods. Under the consulting agreement, we are obligated to pay a consulting fee during each of the one-year terms. Additionally, we were required to grant additional options to the consultant upon the issuance of new securities by the Company to ensure that the founder maintained a 4.9216% ownership in the Company, which obligation expired upon the completion of our initial public offering. Upon the closing of our initial public offering, we issued this consultant an option to purchase 117,187 shares of common stock with an exercise price equal to the initial public offering price of $7.00, as a result of which we recognized compensation expense of $437 during the three-month period ended June 30, 2004.
		We have entered into consulting arrangements with research consultants and scientific advisory board members for various consulting services. The terms of these agreements do not exceed two years and generally require us to pay consulting fees on a monthly or quarterly basis as services are provided.
(11)		Subsequent Event
		On August 6, 2004, the research collaboration under the 2002 Roche Agreement for the development of PDE4 inhibitors was extended for a two-year period. Under the extension agreement, Roche has committed to a minimum of 18 months funding of our research collaboration efforts in the amount of $5,250, commencing September 9, 2004.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q, including the following management’s discussion and analysis of financial condition and results of operations, contains forward-looking statements that you should read in conjunction with the financial statements and notes to financial statements that we have included elsewhere in this report. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,” “estimate,” “predict,” “potential,” “continue,” or the negative of such terms or other similar expressions. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements, and you should not place undue reliance on these statements. Factors that might cause such