##### Table of Contents



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 June 30, 2006
 or
 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.
 
  Delaware
    
    04-3363475(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)100 Philips Parkway, Montvale, New Jersey
    
    07645(Address of Principal Executive Offices)
    
    (Zip Code)
  
   
   þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
  o þ




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MEMORY PHARMACEUTICALS CORP.
 Table of Contents
 Part I. Financial Information
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3BALANCE SHEETS
    
    
    3STATEMENTS OF OPERATIONS
    
    
    4STATEMENTS OF CASH FLOWS
    
    
    5NOTES TO FINANCIAL STATEMENTS
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other Information
    
    
    23Item 1A. Risk Factors
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    25EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (unaudited)
 MEMORY PHARMACEUTICALS CORP.
 
 BALANCE SHEETS
 (unaudited)
 (in thousands, except for share and per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,492
    
    
    $
    39,533Marketable securities
    
    
    643
    
    
    
    4,546Receivables
    
    
    
    
    
    
    1,562Prepaid and other current assets
    
    
    1,174
    
    
    
    1,000Total current assets
    
    
    33,309
    
    
    
    46,641Property and equipment, net
    
    
    8,313
    
    
    
    9,167Restricted cash
    
    
    505
    
    
    
    505Total assets
    
    $
    42,127
    
    
    $
    56,313LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    973
    
    
    $
    759Accrued expenses
    
    
    1,984
    
    
    
    3,839Current portion of equipment notes payable
    
    
    1,030
    
    
    
    1,303Deferred revenue  current
    
    
    5,266
    
    
    
    8,797Total current liabilities
    
    
    9,253
    
    
    
    14,698Warrant liability
    
    
    2,984
    
    
    
    8,477Equipment notes payable, less current portion
    
    
    668
    
    
    
    1,089Deferred revenue  long-term
    
    
    13,264
    
    
    
    11,098Total liabilities
    
    
    26,169
    
    
    
    35,362Stockholders equity:Common stock, $0.001 par value per share;
100,000,000 shares authorized and 37,870,474
and 37,714,703 issued and outstanding at
June 30, 2006, and December 31, 2005,
respectively.
    
    
    38
    
    
    
    38Additional paid-in capital
    
    
    174,606
    
    
    
    173,195Accumulated deficit
    
    
    (158,677
    )
    
    
    (152,120
    )Accumulated other comprehensive loss
    
    
    (9
    )
    
    
    (23
    )Deferred compensation
    
    
    
    
    
    
    (139
    )Total stockholders equity
    
    
    15,958
    
    
    
    20,951Total liabilities and stockholders equity
    
    $
    42,127
    
    
    $
    56,313
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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except for share and per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    1,944
    
    
    $
    2,491
    
    
    $
    4,724
    
    
    $
    4,921Operating expenses:Research and development
    
    
    6,379
    
    
    
    8,819
    
    
    
    13,220
    
    
    
    17,745General and administrative
    
    
    2,063
    
    
    
    2,196
    
    
    
    4,301
    
    
    
    4,282Total operating expenses
    
    
    8,442
    
    
    
    11,015
    
    
    
    17,521
    
    
    
    22,027Loss from operations
    
    
    (6,498
    )
    
    
    (8,524
    )
    
    
    (12,797
    )
    
    
    (17,106
    )Unrealized gain on warrants
    
    
    7,753
    
    
    
    
    
    
    
    5,493
    
    
    
    Interest:Income
    
    
    418
    
    
    
    194
    
    
    
    856
    
    
    
    402Expense
    
    
    (49
    )
    
    
    (76
    )
    
    
    (109
    )
    
    
    (149
    )Interest income, net
    
    
    369
    
    
    
    118
    
    
    
    747
    
    
    
    253Net income/(loss) before income taxes
    
    
    1,624
    
    
    
    (8,406
    )
    
    
    (6,557
    )
    
    
    (16,853
    )Income taxes
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    4Net income/(loss) attributable to common stockholders
    
    $
    1,624
    
    
    $
    (8,408
    )
    
    $
    (6,557
    )
    
    $
    (16,857
    )Income/(loss) per common share attributable to
common stockholders:Basic
    
    $
    0.04
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )
    
    $
    (0.81
    )Diluted
    
    $
    0.04
    
    
    $
    (0.40
    )
    
    $
    (0.17
    )
    
    $
    (0.81
    )Shares used in calculation of net income/(loss) per
common share attributable to common stockholders:Basic
    
    
    37,836,343
    
    
    
    20,873,948
    
    
    
    37,790,868
    
    
    
    20,781,634Diluted
    
    
    38,415,846
    
    
    
    20,873,948
    
    
    
    37,790,868
    
    
    
    20,781,634
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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows used in operating activities:Net loss
    
    $
    (6,557
    )
    
    $
    (16,857
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,032
    
    
    
    1,072Non-cash stock based compensation
    
    
    1,389
    
    
    
    1,365Unrealized gain on warrants
    
    
    (5,493
    )
    
    
    Changes in operating accounts:Receivables
    
    
    1,562
    
    
    
    Prepaid and other current assets
    
    
    (174
    )
    
    
    (577
    )Other assets
    
    
    
    
    
    
    7Accounts payable
    
    
    214
    
    
    
    (976
    )Accrued expenses
    
    
    (1,855
    )
    
    
    340Deferred revenue
    
    
    (1,365
    )
    
    
    330Net cash used in operating activities
    
    
    (11,247
    )
    
    
    (15,296
    )Cash flows provided by investing activities:Purchases of marketable securities
    
    
    (988
    )
    
    
    Sales of marketable securities
    
    
    4,905
    
    
    
    3,831Additions to property and equipment
    
    
    (178
    )
    
    
    (537
    )Net cash provided by investing activities
    
    
    3,739
    
    
    
    3,294Cash flows used in financing activities:Proceeds from issuance of common stock
    
    
    161
    
    
    
    458Proceeds from equipment notes payable
    
    
    
    
    
    
    495Principal repayment equipment notes payable
    
    
    (694
    )
    
    
    (1,025
    )Net cash used in financing activities
    
    
    (533
    )
    
    
    (72
    )Net decrease in cash and cash equivalents
    
    
    (8,041
    )
    
    
    (12,074
    )Cash and cash equivalents, beginning of period
    
    
    39,533
    
    
    
    31,220Cash and cash equivalents, end of period
    
    $
    31,492
    
    
    $
    19,146Supplemental cash flow information:Cash paid for interest
    
    $
    109
    
    
    $
    149Cash paid for taxes
    
    
    3
    
    
    
    2
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MEMORY PHARMACEUTICALS CORP.
 
 NOTES TO FINANCIAL STATEMENTS
 (unaudited)
 in thousands
 (1)
    
    Basis of PresentationAs 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, and also
include certain psychiatric disorders such as schizophrenia, bipolar disorder and depression.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 note disclosures normally included in complete financial
statements prepared in accordance with generally accepted accounting principles in the United
States of America (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, 2005.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)
    
    New Accounting PronouncementEffective January 1, 2006, we began recording compensation expense associated with stock options
and other forms of equity compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment and related Financial Accounting Standards
Boards Staff Positions(SFAS 123R), as interpreted by SEC Staff Accounting Bulletin No. 107 (SAB
107). Prior to January 1, 2006, we accounted for stock options according to the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25),
and related interpretations, and therefore no related compensation expense was recorded for
employee awards granted. We have adopted the modified prospective transition method provided for
under SFAS 123R and, consequently, have not retroactively adjusted results from prior periods.
Under this transition method, compensation cost associated with stock options recognized in the
first six months of fiscal 2006 includes: 1) quarterly amortization related to the remaining
unvested portion of all stock option awards granted prior to January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of the Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS 123); and
2) quarterly amortization related to all stock option awards granted on or subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS
123R.As a result of the adoption of SFAS 123R, the compensation expense recognized in the statements
of operations for the three and six months ended June 30, 2006, was $673,000 and $1,389,000,
respectively.Prior to the adoption of SFAS 123R, all tax benefits resulting from the exercise of stock
options were presented as operating cash flows in the statements of cash flows. SFAS 123R
requires that cash flows resulting from tax deductions in excess of the cumulative compensation
cost recognized for options exercised (excess tax benefits) be classified as financing cash
flows. We have sufficient net operating loss carryforwards to generally eliminate cash payments
for income taxes. Therefore, no excess tax benefits relating to share based payments made to
directors and employees have been recognized.For stock options granted prior to the adoption of SFAS 123R, if compensation expense for our
various stock option plans had been determined based upon estimated fair values at the grant
dates in accordance with SFAS 123, our pro forma net loss and basic and diluted loss per common
share would have been as follows:
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Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2005(in thousands except per share amounts)Net loss attributable to common stockholders, as reported
    
    $
    (8,408
    )
    
    $
    (16,857
    )Add: Stock-based director compensation expense included in reported net loss
    
    
    1,329
    
    
    
    1,365Deduct: Employee stock-based compensation expense under fair-value based method
    
    
    (584
    )
    
    
    (1,032
    )Deduct: Employee compensation for 2004 ESPP under fair-value based method
    
    
    (21
    )
    
    
    (42
    )Pro forma net loss attributable to common stockholders
    
    $
    (7,684
    )
    
    $
    (16,566
    )Pro forma basic and diluted net loss per share of common stock
    
    $
    (0.37
    )
    
    $
    (0.80
    )Net loss attributable to common stockholders, as reported
    
    $
    (8,408
    )
    
    $
    (16,857
    )Basic and diluted net loss per share of common stock, as reported
    
    $
    (0.40
    )
    
    $
    (0.81
    )
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2005
    
    June 30, 2005Expected stock price volatility
    
    70%
    
    70%Expected term until exercise
    
    5 years
    
    5 yearsRisk-free interest rate
    
    3.84%
    
    3.92%Expected dividend yield
    
    0%
    
    0%
 (3)
    
    Stock-Based CompensationAs of June 30, 2006, we had two stock-based compensation
plans, our Amended and Restated 2004 Stock Incentive Plan
(the 2004 Plan) and our 2004 Employee Stock Purchase Plan (the 2004 ESPP), which are
described below. The compensation expense recognized in the statements of operations for the
three months ended June 30, 2006, for stock-based compensation plans was $673,000, of which
$283,000 was a component of general and administrative expenses and $390,000 was a component
of research and development expenses. For the six months ended June 30, 2006, we recognized a
compensation expense for stock-based compensation plans of $1,389,000, of which $682,000 was a
component of general and administrative expenses and $707,000 was a component of research and
development expenses. Cash received from stock options exercised and common stock purchased
under the 2004 ESPP for the three and six months ended June 30, 2006, was $81,000 and
$161,000, respectively.Stock OptionsOur 2004 Plan was adopted in April 2004. The 2004 Plan permits the granting of both incentive
stock options and non-qualified stock options. Stock options are exercisable over a period
determined by our Board of Directors, but such period cannot be longer than ten years after
the grant date. The exercise price is the closing market price of our stock at the date of
grant. Stock options issued generally vest over four years on a quarterly basis (graded
vesting).
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Our 1998 Employee, Director and Consultant Stock Option Plan (the 1998 Equity Plan), was
adopted in March 1998. Both incentive stock options and non-qualified stock options were
granted under the 1998 Equity Plan. Stock options granted under the 1998 Equity Plan are
exercisable over a period of ten years after the grant date. Our Board of Directors
determined the exercise price at the time of grant of such options. Stock options issued
generally vest over four years on a quarterly basis (graded vesting). The 1998 Equity Plan
was superseded by the 2004 Plan.The weighted-average fair value of stock option awards granted after the adoption of SFAS 123R
was $1.57 and $1.71 per share for the three and six months ended June 30, 2006, respectively,
and was estimated on the date of grant using the Black-Scholes option valuation model and the
assumptions noted in the following table.
 Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2006Expected life
    
    5.56 to 6.06 years
    
    5.56 to 6.25 yearsExpected volatility
    
    80.7%
    
    80.7% to 81.5%Risk-free interest rate
    
    4.93% to 4.97%
    
    4.39% to 4.97%Dividend yield
    
    0%
    
    0%
   WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingNumber
    
    
    Exercise Price
    
    
    Contractualof Shares
    
    
    per Share
    
    
    Term (in years)Outstanding at January 1, 2006
    
    
    4,108,058
    
    
    $
    3.47Granted
    
    
    1,078,939
    
    
    
    2.35Exercised
    
    
    (115,349
    )
    
    
    0.75Forfeited or expired
    
    
    (263,045
    )
    
    
    4.28Outstanding at June 30, 2006
    
    
    4,808,603
    
    
    $
    3.24
    
    
    
    8.21Vested and expected to vest at June 30, 2006
    
    
    3,937,951
    
    
    $
    3.38
    
    
    
    7.92Vested and exercisable at June 30, 2006
    
    
    2,213,949
    
    
    $
    3.33
    
    
    
    7.10
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Employee Stock Purchase Plan
    Three and SixMonths EndedJune 30, 2006Expected life
    
    1.25 yearsExpected volatility
    
    81.5%Risk-free interest rate
    
    4.48%Dividend yield
    
    0%
 At adoption of SFAS 123R, we expected that 161,688 shares would be purchased under the 2004
ESPP through the offering period which would have expired on July 31, 2007. An additional
3,408 shares with a grant-date fair value of $1.23 were added for employees that entered the
2004 ESPP on February 1, 2006. On January 31, 2006, 40,422 shares were purchased under the
2004 ESPP for $76,000, with an intrinsic value of $27,000 at the purchase date. During the
three and six months ended June 30, 2006, employees forfeited 10,842 and 12,579 shares of
common stock expected to be purchased, respectively.At June 30, 2006, we had 112,095 share options outstanding under the 2004 ESPP with a weighted
average grant date fair value of $2.33 per share and an aggregate intrinsic value of $18,000.As of June 30, 2006, there was $225,000 of total unrecognized compensation cost related to
share options under the 2004 ESPP, which is expected to be recognized over the remaining
weighted-average vesting period of 7 months.
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(4)
    
    Net Loss Per ShareBasic net loss per share is calculated by dividing net loss attributable to the holders of our
common stock by the weighted average number of shares of common stock outstanding during the
period. Diluted income per share of common stock is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the period plus all
additional dilutive shares of common stock equivalents. Dilutive common stock equivalents
include the dilutive effect of in-the-money options or warrants, which is calculated based on
the average share price for each period using the treasury stock method. Under the treasury
stock method, the exercise price of a share, the average amounts of unrecognized compensation
cost, if any, for future service, and the amount of tax benefits that would be recorded in
additional paid-in-capital, if any, when the share is exercised, are assumed to be used to
repurchase shares in the current period.Since we had a net loss for the six months ended June 30, 2006, and for the three and six months
ended June 30, 2005, 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 stock
options to purchase shares of common stock and warrants to purchase shares of common stock,
because the effect would be anti-dilutive.For the three months ended June 30, 2006, we reported net income of $1.6 million and diluted
earnings per share of common stock of $0.04. The dilutive calculation includes 579,503 of
additional in-the-money options and warrants. Net income resulted from a significant reduction in
the market price of our common stock causing our warrant liability to reverse by approximately
$7.8 million for the three months ended June 30, 2006.For the three months ended June 30, 2006, basic and diluted income per share of common stock
were computed as follows:
 Three Months EndedJune 30, 2006EPS Numerator  BasicNet income
    
    $
    1,623,590EPS Denominator  BasicWeighted-average common shares outstanding
    
    
    37,836,343EPS Numerator  DilutedNet income
    
    $
    1,623,590EPS Denominator  DilutedWeighted-average common shares outstanding
    
    
    37,836,343Effect of dilutive securities  stock options
    
    
    579,503Dilutive potential common shares
    
    
    38,415,846Basic income per common share
    
    $
    0.04Diluted income per common share
    
    $
    0.04
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Common stock options
    
    
    4,234,914
    
    
    
    3,352,929
    
    
    
    4,554,423
    
    
    
    3,120,164Warrants
    
    
    5,913,267
    
    
    
    119,907
    
    
    
    5,913,267
    
    
    
    119,907Total
    
    
    10,148,181
    
    
    
    3,472,836
    
    
    
    10,467,690
    
    
    
    3,240,071
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(5)
    
    Marketable SecuritiesOur 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.The following is a summary of our available-for-sale investments in debt securities that we
include in current assets on our balance sheets at fair value:
 June 30, 2006
    
    
    December 31, 2005Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss(in thousands)Corporate debt securities
    
    $
    
    
    
    $
    
    
    
    $
    1,003
    
    
    $
    6Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of US government agencies
    
    
    
    
    
    
    
    
    
    
    2,399
    
    
    
    3Mortgage-backed and asset-backed securities
    
    
    643
    
    
    
    2
    
    
    
    1,144
    
    
    
    8Marketable securities due over 90 days
    
    $
    643
    
    
    $
    2
    
    
    $
    4,546
    
    
    $
    17Commercial paper
    
    
    10,574
    
    
    
    2
    
    
    
    19,156
    
    
    
    6Obligations of US government agencies
    
    
    18,320
    
    
    
    5
    
    
    
    12,289
    
    
    
    Marketable securities due in 90 days or less *
    
    $
    28,894
    
    
    $
    7
    
    
    $
    31,445
    
    
    $
    6Total marketable securities
    
    $
    29,537
    
    
    $
    9
    
    
    $
    35,991
    
    
    $
    23
 
 *    Classified as cash and cash equivalents on the balance sheets.




Cost
    
    
    Fair value(in thousands)Due in 90 days or less *
    
    $
    28,901
    
    
    $
    28,894Due after 90 days, up to one year
    
    
    
    
    
    
    Due after one year, up to two years
    
    
    171
    
    
    
    170Due after two years
    
    
    473
    
    
    
    473$
    29,545
    
    
    $
    29,537


*      Classified as cash and cash equivalents on the balance sheets.


We evaluate declines in the 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. Gain or loss on the sale of marketable securities
is determined using the specific identification method.


(6)    Comprehensive Income/Loss


Comprehensive income/loss includes net income/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


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comprehensive loss in stockholders equity on our balance sheets. For the three months ended
June 30, 2006, comprehensive income was $1.6 million, including an unrealized gain on marketable
securities of $5,000, and for the three months ended June 30, 2005, comprehensive loss was $8.4
million, including an unrealized gain on marketable securities of $16,000. For the six months
ended June 30, 2006, comprehensive loss was $6.6 million, including an unrealized gain on
marketable securities of $14,000 and for the six months ended June 30, 2005, comprehensive loss
was $16.9 million, including an unrealized gain on marketable securities of $9,000.(7)
    
    License Agreements and CollaborationsBayer AG in-licenseIn June 2001, we entered into an agreement with Bayer for an exclusive, worldwide,
sub-licensable license under certain Bayer patents and know-how to MEM 1003 for the treatment of
human peripheral and CNS-related disorders. As of June 30, 2006, we have paid $2.0 million in
upfront and milestone payments to Bayer. We are required to make additional payments of up to
$18.0 million upon our achievement of specified milestones. We are also obligated to pay
royalties during the term of the agreement based on a specified percentage of worldwide net
sales of products covered by the license agreement, which increases at increasing net sales
levels and varies depending on whether the sales are made by us or by a sub-licensee.Hoffmann-LaRoche (2002 Roche Agreement)In July 2002, we entered into an agreement with Roche for the development of PDE4 inhibitors for
the treatment of neurological and psychiatric indications, and potentially other indications.
Under this agreement, we granted Roche a worldwide, exclusive, sub-licensable 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 this agreement, Roche
provided us with research and development funding, initially for a two-year period, which was
extended in August 2004 for an additional two years. In August 2005, we amended the 2002 Roche
Agreement to reacquire the right to develop and commercialize MEM 1414 and MEM 1917, following
Roches earlier decision not to pursue further clinical development of these candidates, and
Roche received an option, exercisable following the completion of Phase 2 clinical trials for
each drug candidate, to continue that drug candidates development and commercialization. If
Roche exercises its option to obtain an exclusive license to MEM 1414 and/or MEM 1917 and
continues the development and commercialization of either drug candidate, we will be entitled to
receive development-related milestone payments for specified events occurring after the
initiation of Phase 3 clinical trials and royalties based on worldwide sales. In addition,
under certain circumstances, we will have the option to co-promote MEM 1414 and MEM 1917 in the
US or in the US and the European Union (EU). Roche maintains its exclusive, worldwide license to
develop and commercialize all other drug candidates from our PDE4 inhibitor program. In
February 2006, in connection with an amendment to our original 2003 Roche Agreement (as
described below), we further amended the 2002 Roche Agreement to terminate Roches obligation to
make research and development funding payments in support of the PDE4 research collaboration.
Roche maintains its exclusive, worldwide license to develop and commercialize candidates from
the PDE4 inhibitor program.Roche has paid us a total of $26.0 million through June 30, 2006 under the 2002 Roche Agreement,
comprised of an upfront license fee of $8.0 million, research and development funding of $14.0
million and milestone payments totalling $4.0 million. Roche is obligated to make future
payments to us if specified developmental milestones are achieved.Revenue relating to the upfront license payment and milestone
payments is being recognized over the period  in which we expect to
obtain FDA approval of the first compound to be developed under the
collaboration. During
the three month period ended June 30, 2006, we recognized revenue of $223,000 related to the
upfront license fee and milestone payments received. During the six month period ended June 30,
2006, we recognized revenue of $1.3 million representing $446,000 related to the upfront license
fee and milestone payments received, and $875,000 related to the funding of the research
collaboration. During the three month period ended June 30, 2005, we recognized revenue of $1.1
million, representing $223,000 related to the upfront license fee and milestone payments
received and $875,000 related to the funding of the research collaboration. During the six
month period ended June 30, 2005, we recognized $2.4 million representing $635,000 related to
the upfront license fee and milestone payments received and $1.8 million related to the funding
of the research collaboration.
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Hoffmann-LaRoche (Amended and Restated 2003 Roche Agreement)In August 2003, we entered into a second collaboration with Roche for the development of
nicotinic alpha-7 agonists for the treatment of CNS indications including schizophrenia and
Alzheimers disease (the 2003 Roche Agreement). This agreement was amended and restated on
February 27, 2006. Under the terms of the Amended and Restated 2003 Roche Agreement, we have
granted to Roche a worldwide, exclusive, sub-licensable license to all of our patent rights and
know-how with respect to our nicotinic alpha-7 agonists, other than MEM 3454, for the prevention
and treatment of diseases, in all indications, for either human or veterinary use. With respect
to MEM 3454, Roche has the option to obtain a license following our completion of the Phase 2a
clinical trial for this drug candidate. Under the terms of the Amended and Restated 2003 Roche
Agreement, we will receive an aggregate of $1.8 million of research and development funding in
2006 and we will receive approximately $2.3 million (based on 1 USD: 1.31 CHF) in research and
development funding in 2007.Roche has paid us a total of $28.9 million through June 30, 2006 under the Amended and
Restated 2003 Roche Agreement, comprised of an upfront license fee of $10.0 million, an equity
investment of $10.0 million, research and development funding of $6.9 million and a milestone
payment of $2.0 million. Roche is obligated to make future payments to us if specified
developmental milestones are achieved.Revenue relating to the upfront license payment, research and
development funding and milestone
payments is being recognized over the period in which we expect to
obtain FDA approval of the first compound to be developed under
the Amended and Restated 2003 Agreement. During the three month period ended June 30, 2006, we
recognized revenue of $262,000. During the three month period ended June 30, 2005, we
recognized revenue of $1.4 million. During the six month period ended June 30, 2006, we
recognized revenue of $494,000. During the six month period ended June 30, 2005, we recognized
revenue of $2.5 million.Amgen Inc. (2005 Amgen Agreement)On October 14, 2005, we entered into a Collaboration and License Agreement with Amgen for the
development of PDE10 inhibitors for neurological and psychiatric disorders. Under the terms of
the agreement, we have received a $5.0 million up-front fee and $3.2 million in research and
development funding to date. We and Amgen are conducting a collaborative preclinical research
program relating to PDE10 inhibitors for a two-year period in accordance with a predefined
research workplan. Subject to Amgens right to terminate the agreement or terminate specified
rights thereunder, we are entitled to receive (i) $3.3 million in research funding during the
first year of the research collaboration and (ii) a minimum of $1.8 million in research funding
during the second year of the research collaboration. Amgen is also obligated to make milestone
payments to us upon the achievement of pre-specified research, development, regulatory approval
and sales milestones relating to PDE10 inhibitors.We are recognizing revenue over the two-year agreement period based on the level of actual
research efforts expended in a period as compared to our estimated efforts over the full period.
During the three month period ended June 30, 2006, we recognized revenue of $1.5 million
representing the upfront license payment and research and development funding. During the six
month period ended June 30, 2006, we recognized revenue of $3.0 million representing the upfront
license payment and research and development funding.The Stanley Medical Research Institute (SMRI Development Agreement)On December 20, 2005, we entered into a development agreement with SMRI for the development of
MEM 1003 as a treatment for bipolar disorder or schizophrenia. Under the terms of the SMRI
Development Agreement, we are eligible to receive up to $3.2 million in funding from SMRI to
support the development of MEM 1003 for the treatment of bipolar disorder or schizophrenia over
the development term of three years, which term may be extended for additional one-year periods.
As of June 30, 2006, we received $960,000 in exchange for the issuance of 440,367 shares of our
common stock and a warrant to purchase 154,128 shares of our common stock at an exercise price
of $2.62 per share that became exercisable on June 17, 2006 and expires on December 19, 2010.
We are eligible to receive the remaining $2.2 million as milestone payments upon the achievement
of certain milestones related to the Phase 2a trial in bipolar disorder, which we plan to
commence during the third quarter of 2006. If we fail to achieve the third milestone by
December 31, 2007, we will be required to refund to SMRI the portion of the $2.2 million of
development funding advanced by SMRI as of that date.
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(8)
    
    September 2005 Private PlacementOn September 23, 2005, we completed a private placement in which we issued 16,112,158
shares of common stock, at a price of $1.90 per share, and warrants to purchase an aggregate of
5,639,232 shares of common stock, resulting in net proceeds of $29.0 million.The warrants are currently exercisable, have a five-year term and an exercise price per
share of $2.22. In accordance with EITF No. 00-19, Accounting for derivative financial
instruments indexed to, and potentially settled in, a companys own stock, the warrants have
been recorded as a long-term liability and valued at fair value on the date of issuance. The
fair value of the warrants on the date of issuance was $6.8 million and was determined using the
Black-Scholes model with the following assumptions: dividend yield of 0%; estimated volatility
of 80%; risk free interest rate of 4.07% and a contractual life of five years.As required under the terms of the Securities Purchase Agreement, pursuant to which the
private placement was consummated, we filed a registration statement with the Securities and
Exchange Commission (SEC) to register for resale the shares of common stock and the shares of
common stock issuable upon the exercise of the warrants sold in the private placement. The
registration statement became effective on November 7, 2005.In addition, we agreed to use our reasonable best efforts to keep the registration
statement effective until the earlier of two years after the effective date of the registration
statement or the date on which the shares of common stock and the shares of common stock
issuable upon exercise of the warrants become eligible for resale pursuant to Rule 144(k) under
the Securities Act of 1933, as amended. If we suspend or otherwise fail to maintain
effectiveness, we will have to pay each purchaser liquidated damages in an amount equal to 1.0%
of the purchase price paid by such purchaser for the securities in the private placement for
each 30-day period during which such registration statement is suspended or otherwise not
effective.The fair value of the warrant liability is recalculated at each balance sheet date, with
the non-cash change in the fair value reported on the consolidated statement of operations. We
have recorded an unrealized gain on the warrants of $7.8 million and $5.5 million for the three
and six months ended June 30, 2006, respectively. This amount will be adjusted at the end of
each quarter to reflect any change in fair value at such date.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   OVERVIEW
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CRITICAL ACCOUNTING POLICIES
  16




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Revenue recognition
 , Revenue Recognition
  Accounting for Revenue Arrangements with Multiple
Deliverables
   Share-Based Compensation
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Accrued expenses
  Ø
    
    professional service fees, such as attorneys and accountants fees;Ø
    
    preclinical and clinical contract research organization fees;Ø
    
    fees to be paid to data management organizations and investigators in conjunction with clinical trials; andØ
    
    fees to be paid to contract manufacturers in conjunction with the production of the
clinical supply of our drug candidates.
  Research and development expense
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RESULTS OF OPERATIONS
 Three Months Ended June 30, 2006 compared to Three Months Ended June 30, 2005
 Revenue
   Research and development expense
  General and administrative expense
  Net income and change in fair value of warrants
  Interest income and interest expense
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Six Months Ended June 30, 2006 compared to Six Months Ended June 30, 2005
 Revenue
   Research and development expense
  General and administrative expense
  Change in fair value of warrants
  Interest income and interest expense
  Liquidity and capital resources
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Ø
    
    the number of compounds and drug candidates that we advance through the development process;Ø
    
    whether we are able to enter into collaborations and the terms of any such collaboration;Ø
    
    the scope and results of our and our collaborators clinical trials;Ø
    
    potential in-licensing or acquisition of other compounds or technologies;Ø
    
    the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;Ø
    
    the timing of, and the costs involved in, obtaining regulatory approvals;Ø
    
    the availability of third parties, and the cost, to manufacture compounds for clinical trial supply;Ø
    
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other patent-related costs, including litigation costs and the results
of such litigation; andØ
    
    the cost of commercialization activities, including product marketing, sales and
distribution.
  New Accounting Pronouncement
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
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PART II. OTHER INFORMATION.
 
 Item 1A. Risk Factors
 In addition to the other information set forth in this report, you should carefully consider the
risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2005 , as well as those discussed in Part II, Item 1A. Risk Factors
in our Quarterly Report on Form 10-Q for the period ended March 31, 2006., which could materially
affect our business, financial condition or future results. The risks described in our Annual
Report on Form 10-K, as updated by our quarterly reports on Form 10-Q, are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  Proposal One.
 Name of Nominee
    
    Total Votes For
    
    Total Votes WithheldAnthony B. Evnin, Ph.D
    
    
    29,025,620
    
    
    
    991,738David A. Lowe, Ph.D
    
    
    29,205,133
    
    
    
    812,225Peter F. Young
    
    
    29,198,831
    
    
    
    818,527
  Proposal Two.
 Total Shares Voted
    
    Total Votes For
    
    Total Votes Against
    
    Total Votes Abstained19,134,064
    
    
    
    529,527
    
    
    
    39,732
  Proposal Three.
 Total Shares Voted
    
    Total Votes For
    
    Total Votes Against
    
    Total Votes Abstained29,863,277
    
    
    
    91,450
    
    
    
    62,360
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Item 6. Exhibits
 31.1
    
    
    Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification by the Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:
    /s/ Joseph M. DonabauerJoseph M. DonabauerVice President & Controller
(Principal Financial and Accounting Officer and
Duly Authorized Officer)  25




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Exhibit Index
 31.1
    
    
    Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification by the Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 26