MEMORY PHARMACEUTICALS CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50642

Memory Pharmaceuticals Corp.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		04-3363475

(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer Identification No.)
Organization)

100 Philips Parkway, Montvale, New Jersey		07645

(Address of Principal Executive Offices)		(Zip Code)

(201) 802-7100

(Registrant’s Telephone Number, Including Area Code)

None.

(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 the past 90 days.

þ Yes o No

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

o Yes þ No

As of May 6, 2005 the registrant had 20,806,442 shares of common stock, $0.001 par value per share, outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

MEMORY PHARMACEUTICALS CORP.

BALANCE SHEETS

(unaudited)

(in thousands, except for share and per share amounts)


	March 31,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	23,507		$	31,220
Marketable securities		7,484			9,876
Receivables		921			875
Prepaid and other current assets		1,059			538

Total current assets		32,971			42,509
Property and equipment, net		10,233			10,376
Restricted cash		505			505
Other assets		—			7

Total assets	$	43,709		$	53,397

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,556		$	1,691
Accrued expenses		2,627			3,177
Current portion of equipment notes payable		1,701			1,806
Deferred revenue — current		5,952			7,095

Total current liabilities		11,836			13,769
Equipment notes payable, less current portion		1,769			1,714
Deferred revenue — long-term		10,810			10,472

Total liabilities		24,415			25,955


Stockholders’ equity:
Common stock, $0.001 par value per share; 100,000,000 shares authorized and 20,760,714 issued and outstanding at March 31, 2005, and 100,000,000 shares authorized and 20,547,442 issued and outstanding at December 31, 2004;		21			21
Additional paid-in capital		148,454			148,182
Accumulated deficit		(128,883	)		(120,434	)
Accumulated other comprehensive loss		(52	)		(45	)
Deferred compensation		(246	)		(282	)

Total stockholders’ equity		19,294			27,442

Total liabilities and stockholders’ equity	$	43,709		$	53,397

See accompanying notes to financial statements.

MEMORY PHARMACEUTICALS CORP.

STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except for share and per share amounts)


	Three Months Ended
	March 31,
	2005			2004
Revenue	$	2,430		$	2,371
Operating expenses:
Research and development		8,926			5,815
General and administrative		2,086			1,378

Total operating expenses		11,012			7,193

Loss from operations		(8,582	)		(4,822	)


Interest:
Income		208			97
Expense		(73	)		(105	)

Interest income (expense), net		135			(8	)

Net loss before income taxes		(8,447	)		(4,830	)
Income taxes		2			2

Net loss		(8,449	)		(4,832	)
Less redeemable convertible preferred stock dividends and accretion		—			1,917

Net loss attributable to common stockholders	$	(8,449	)	$	(6,749	)


Basic and diluted net loss per share of common stock	$	(0.41	)	$	(5.89	)

Basic and diluted weighted average number of shares of common stock outstanding		20,689,320			1,146,307

See accompanying notes to financial statements.

MEMORY PHARMACEUTICALS CORP.

STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three Months Ended
	March 31,
	2005			2004
Cash flows used in operating activities:
Net loss	$	(8,449	)	$	(4,832	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		534			464
Non-cash stock based compensation		36			197
Changes in operating accounts:
Receivables		(46	)		2,019
Prepaid and other current assets		(521	)		(1,414	)
Other assets		7			8
Accounts payable		(135	)		(773	)
Accrued expenses		(550	)		33
Deferred revenue		(805	)		(745	)

Net cash used in operating activities		(9,929	)		(5,043	)

Cash flows used in investing activities:
Purchases of marketable securities		—			(7,405	)
Sales of marketable securities		2,385			2,549
Additions to property and equipment		(391	)		(1,828	)

Net cash provided by / (used in) investing activities		1,994			(6,684	)

Cash flows provided by financing activities:
Proceeds from issuance of common stock		272			8
Proceeds from equipment notes payable		495			960
Principal repayment equipment notes payable		(545	)		(570	)

Net cash provided by financing activities		222			398

Net decrease in cash and cash equivalents		(7,713	)		(11,329	)
Cash and cash equivalents, beginning of period		31,220			16,884

Cash and cash equivalents, end of period	$	23,507		$	5,555

Supplemental cash flow information:
Cash paid for interest	$	73		$	105
Cash paid for taxes		—			4
Accrued dividends on redeemable convertible preferred stock		—			1,765
Accretion of redeemable convertible preferred stock to liquidation value		—			152

See accompanying notes to financial statements.

MEMORY PHARMACEUTICALS CORP.

NOTES TO FINANCIAL STATEMENTS
(unaudited)

(1)   Basis of Presentation

    As used herein, “we,” “us,” “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 U.S. generally accepted accounting principles (U.S. 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 Annual Report on Form 10-K for the year ended December 31, 2004.

    We are responsible for the financial statements included in this document. Our interim financial statements are unaudited. 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.

(2)   Recent Accounting Developments

    On December 16, 2004 the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R). This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for all share-based payment arrangements. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, Stock-based Payment, which summarizes the views of the staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SFAS 123R was originally effective as of the beginning of the first interim or annual reporting period after June 15, 2005. However, on April 14, 2005 the SEC announced a new rule that amended the effective dates for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. As such, we will adopt SFAS 123R as of the beginning of the first quarter of 2006. The adoption of this Statement is expected to 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.

    We account for stock options and warrants granted to non-employees based on the fair value of the stock option or warrant. Fair market value is 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. 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.

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 below. Because options granted during 2005 and 2004 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.


	Three Months ended March 31,
	2005			2004
	(in thousands, except per share amounts)
Net loss attributable to common stockholders, as reported	$	(8,449	)	$	(6,749	)

Add: Stock-based employee compensation expense included in reported net loss		36			197

Deduct: Employee stock-based compensation expense for stock option grants under fair-value based method		(448	)		(215	)

Deduct: Employee compensation for 2004 Employee Stock Purchase Plan under fair-value based method		(21	)		—


Pro forma net loss attributable to common stockholders	$	(8,882	)	$	(6,767	)


Pro forma basic and diluted net loss per share of common stock	$	(0.43	)	$	(5.90	)


Net loss attributable to common stockholders, as reported	$	(8,449	)	$	(6,749	)


Basic and diluted net loss per share of common stock, as reported	$	(0.41	)	$	(5.89	)

The fair values of these option grants were calculated using weighted averages of assumptions for the multiple stock options granted during the three-month periods ended March 31, 2005 and 2004.


	Three Months ended
	March 31, 2005			March 31, 2004
Expected stock price volatility		70	%		60	%
Expected term until exercise	5 years			5 years
Risk-free interest rate		4.0	%		3.2	%
Expected dividend yield		0	%		0	%

The per share weighted average fair value of stock options granted during the three months ended March 31, 2005 and 2004 was determined using the Black-Scholes option-pricing model. These assumptions resulted in weighted average fair values of $3.06 and $11.97 per share for stock options granted in the three months ended March 31, 2005 and 2004, respectively.

Stock Options

During the three months ended March 31, 2004, we 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 our 1998 Employee, Director and Consultant Stock Option Plan. Deferred compensation expense of $1.1 million attributable to the intrinsic value of the options granted was measured at the measurement date for the grant. The compensation expense associated with that option grant was recognized ratably over the expected four-year vesting period. The Company recognized $197,000 of total compensation expense during the three-month period ended March 31, 2004. The employee terminated his employment with us subsequent to March 31, 2004.

In connection with the resignation of our former President, we agreed to extend the period during which he would be entitled to exercise certain vested stock options to purchase our common stock from three months following the effective date of his resignation, April 1, 2005, to 12 months following such effective date. We will record any associated compensation expense related to a modification of the exercise period in the second quarter of 2005.

(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 excludes the effect of the potential exercise of options to purchase shares of common stock and warrants to purchase shares of common stock, because the effect would be anti-dilutive. In addition, the diluted weighted average number of shares outstanding for the three-month period ended March 31, 2004 excludes redeemable convertible preferred stock that would have converted into 13,295,427 shares of common stock, since the effects would be anti-dilutive. Such shares are summarized as follows:


	Three Months Ended March 31,
	2005		2004

Common stock options		2,899,078		2,483,597
Warrants		119,907		164,514
Redeemable convertible preferred stock		—		13,295,427

Total		3,018,985		15,943,538

Pro Forma Net Loss Per Share

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 period ended March 31, 2004 as compared to the three-month period ended March 31, 2005:


	Three Months ended March 31,
(in thousands, except share and per share amounts)	2005			2004
Reported basic and diluted:
Net loss	$	(8,449	)	$	(4,832	)
Dividends and accretion to redemption value		—			(1,917	)

Net loss attributable to common stockholders		(8,449	)		(6,749	)

Basic and diluted weighted average number of shares of common stock outstanding		20,689,320			1,146,307

Basic and diluted net loss per share	$	(0.41	)	$	(5.89	)


Pro forma basic and diluted:
Net loss		(8,449	)		(4,832	)

Basic and diluted weighted average number of shares of common stock outstanding		20,689,320			1,146,307
Weighted average number of shares of common stock outstanding assuming the conversion of all redeemable convertible preferred stock and exercise of certain warrants at the date of original issuance		—			13,296,963

Pro forma basic and diluted weighted average shares of common stock outstanding		20,689,320			14,443,270

Pro forma basic and diluted net loss per share	$	(0.41	)	$	(0.33	)

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.

    Dividends on the redeemable convertible preferred stock accrued at an annual rate of 8%, whether or not funds were legally available or dividends were declared by our 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 $19.5 million were forfeited.

(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 $35.3 million. 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

    On April 8, 2004, the closing date of our initial public offering, 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.

    Common stock issued upon the automatic conversion was as follows:


								Common
		Shares		Carrying		Conversion		Stock
Series	Date Issued	Issued		Amount		Ratio		Issued
A	April 1998		1,000,000	$	987,000		0.3333		333,332
B	December 1998, March 1999		6,142,857		10,732,000		0.3333		2,047,615
C⁽¹⁾	June, August 2000		10,000,000		24,976,000		0.3559		3,558,521
D	March, April 2002		19,290,130		40,541,000		0.3333		6,430,033

Roche⁽²⁾	September 2003		2,777,778		9,522,000		0.3333		925,926

				$	86,758,000				13,295,427

(1)		As a result of our issuance of Series D redeemable convertible preferred stock at a price per share less than $2.50, the conversion ratio of the number of shares of common stock into which each share of Series C is convertible was adjusted so that each share of Series C is convertible into 0.3559 shares of common stock. Pursuant to this anti-dilution provision, the conversion of Series C would have resulted in the issuance of an additional 225,195 shares of common stock. However, we recorded a deemed dividend of $169,000 during 2002 to recognize the value attributable to the increase in conversion ratio based on an estimated fair value of the common stock.

(2)		We issued 2,777,778 shares of Series Roche redeemable convertible preferred stock and 115,740 warrants to purchase common stock at $12.96 per share to Roche for $10.0 million. The proceeds of $10.0 million were allocated to redeemable convertible preferred stock and additional paid-in capital based on the relative fair value of the preferred stock and the warrants. We also recorded a beneficial conversion feature of $584,000, which increased the net loss attributable to common stockholders during the year ended December 31, 2003.

(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 in accumulated other comprehensive loss. 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.


	March 31,				December 31,
	2005				2004
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(in thousands)
Corporate debt securities	$	3,432	$	31	$	5,360	$	27
Obligations of US government agencies	$	1,199		5		1,302		2
Mortgage-backed and asset-backed securities	$	2,853		16		3,214		16

	$	7,484	$	52	$	9,876	$	45

    We evaluate declines in fair value of our investments in available-for-sale marketable securities to determine if these declines are other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded and a new cost basis in the investment would be established.

(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 on our balance sheet. For the three months ended March 31, 2005, comprehensive loss was $8.5 million, which includes our net loss of $8.4 million, and an unrealized loss on available-for-sale marketable securities of $7,000. For the three months ended March 31, 2004, comprehensive loss was $6.7 million, which includes our net loss of $6.7 million offset by an unrealized gain on available-for-sale marketable securities of $48,000.

(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 March 31, 2005, we have paid $1.0 million 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 other potential 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 March 31, 2005, Roche has made an $8.0 million upfront license payment and two $2.0 million milestone payments. Roche is obligated to make future payments if specified developmental milestones are achieved. 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. In connection with this extension, Roche has committed to a minimum of 18 months’ funding of our research collaboration efforts in the aggregate amount of $5.3 million, payable quarterly commencing September 2004. On April 15, 2005, we announced that Roche had decided not to pursue further development on its own of the two named drug candidates under our PDE4 inhibitor collaboration MEM 1414 and its back-up MEM 1917 and that the two companies have commenced discussions to determine the future of these two drug candidates.

    During each of the three month periods ended March 31, 2005 and March 31, 2004, we recognized revenue of $1.3 million, under the 2002 Roche Agreement, representing $412,000, related to the upfront license payment and milestone payments received, which are being amortized over the expected development period of 7.5 years from the date of the collaboration, and $875,000, related to the funding of the research collaboration. As a result of Roche’s decision not to pursue further development on its own of MEM 1414 and its back-up MEM 1917, and subject to the results of our discussions with Roche, we may reassess the expected development period under the 2002 Roche Agreement.

    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 $10.0 million 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 $750,000 over a two-year period for research collaboration efforts.

    During the second quarter of 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 preclinical 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-month periods ended March 31, 2005 and March 31, 2004, the Company recognized revenue of $1.1 million, under the 2003 Roche Agreement. See also “Recent Developments” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(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. In April 2005, the agreement was automatically extended for a one-year period.

    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.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to help you better understand and evaluate our financial condition and results of operations. We recommend that you read this section in conjunction with our financial statements and notes to financial statements in Item 1 and with our Annual Report on Form 10-K for the year ended December 31, 2004.

This quarterly report on Form 10-Q, including the following MD&A, contains forward-looking statements that you should read in conjunction with the financial statements and notes to financial statements that we have included in Item 1. 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. O

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Part I. Financial Information			3

Item 1. Financial Statements (unaudited)			3

BALANCE SHEETS			3

STATEMENTS OF OPERATIONS			4

STATEMENTS OF CASH FLOWS			5

NOTES TO FINANCIAL STATEMENTS			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12


Item 3. Quantitative and Qualitative Disclosures About Market Risk			31

Item 4. Controls and Procedures			31

Part II. Other Information			32

Item 6. Exhibits			32

SIGNATURES			33
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATE

(1)	Basis of Presentation

	As used herein, “we,” “us,” “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 U.S. generally accepted accounting principles (U.S. 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 Annual Report on Form 10-K for the year ended December 31, 2004.

	We are responsible for the financial statements included in this document. Our interim financial statements are unaudited. 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.

(2)	Recent Accounting Developments

	On December 16, 2004 the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R). This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for all share-based payment arrangements. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, Stock-based Payment, which summarizes the views of the staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SFAS 123R was originally effective as of the beginning of the first interim or annual reporting period after June 15, 2005. However, on April 14, 2005 the SEC announced a new rule that amended the effective dates for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. As such, we will adopt SFAS 123R as of the beginning of the first quarter of 2006. The adoption of this Statement is expected to 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.

	We account for stock options and warrants granted to non-employees based on the fair value of the stock option or warrant. Fair market value is 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. 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

(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 excludes the effect of the potential exercise of options to purchase shares of common stock and warrants to purchase shares of common stock, because the effect would be anti-dilutive. In addition, the diluted weighted average number of shares outstanding for the three-month period ended March 31, 2004 excludes redeemable convertible preferred stock that would have converted into 13,295,427 shares of common stock, since the effects would be anti-dilutive. Such shares are summarized as follows:

	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.

	Dividends on the redeemable convertible preferred stock accrued at an annual rate of 8%, whether or not funds were legally available or dividends were declared by our 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 $19.5 million were forfeited.

(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 $35.3 million. 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

	On April 8, 2004, the closing date of our initial public offering, 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.

	Common stock issued upon the automatic conversion was as follows:

(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 in accumulated other comprehensive loss. 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.

	We evaluate declines in fair value of our investments in available-for-sale marketable securities to determine if these declines are other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded and a new cost basis in the investment would be established.

(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 on our balance sheet. For the three months ended March 31, 2005, comprehensive loss was $8.5 million, which includes our net loss of $8.4 million, and an unrealized loss on available-for-sale marketable securities of $7,000. For the three months ended March 31, 2004, comprehensive loss was $6.7 million, which includes our net loss of $6.7 million offset by an unrealized gain on available-for-sale marketable securities of $48,000.

(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 March 31, 2005, we have paid $1.0 million 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 other potential 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 March 31, 2005, Roche has made an $8.0 million upfront license payment and two $2.0 million milestone payments. Roche is obligated to make future payments if specified developmental milestones are achieved. 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. In connection with this extension, Roche has committed to a minimum of 18 months’ funding of our research collaboration efforts in the aggregate amount of $5.3 million, payable quarterly commencing September 2004. On April 15, 2005, we announced that Roche had decided not to pursue further development on its own of the two named drug candidates under our PDE4 inhibitor collaboration MEM 1414 and its back-up MEM 1917 and that the two companies have commenced discussions to determine the future of these two drug candidates.

	During each of the three month periods ended March 31, 2005 and March 31, 2004, we recognized revenue of $1.3 million, under the 2002 Roche Agreement, representing $412,000, related to the upfront license payment and milestone payments received, which are being amortized over the expected development period of 7.5 years from the date of the collaboration, and $875,000, related to the funding of the research collaboration. As a result of Roche’s decision not to pursue further development on its own of MEM 1414 and its back-up MEM 1917, and subject to the results of our discussions with Roche, we may reassess the expected development period under the 2002 Roche Agreement.

	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 $10.0 million 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 $750,000 over a two-year period for research collaboration efforts.

	During the second quarter of 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 preclinical 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-month periods ended March 31, 2005 and March 31, 2004, the Company recognized revenue of $1.1 million, under the 2003 Roche Agreement. See also “Recent Developments” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(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. In April 2005, the agreement was automatically extended for a one-year period.

	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.