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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, 2008
 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
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    04-3363475
(I.R.S. Employer Identification No.)100 Philips Parkway, Montvale, New Jersey
(Address of Principal Executive Offices)
    
    07645
(Zip Code)
 
  
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



MEMORY PHARMACEUTICALS CORP.
 Table of Contents
 Part I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3BALANCE
SHEETS (unaudited)
    
    
    3STATEMENTS OF OPERATIONS (unaudited)
    
    
    4STATEMENTS OF CASH FLOWS (unaudited)
    
    
    5NOTES TO FINANCIAL STATEMENTS (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 4T. Controls and Procedures
    
    
    25Part II. Other Information.
    
    
    26Item 1A. Risk Factors
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EX.10.1 THIRD AMENDMENT TO AMENDED AND RESTATED STRATEGIC ALLIANCE AGREEMENTEX.31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934EX.31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934.EX.32.1 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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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 MEMORY PHARMACEUTICALS CORP.
BALANCE SHEETS
(unaudited)
(in thousands, except for share and per share amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,463
    
    
    $
    38,167Marketable securities
    
    
    30
    
    
    
    34Prepaid and other current assets
    
    
    1,359
    
    
    
    1,417Total current assets
    
    
    28,852
    
    
    
    39,618Property and equipment, net
    
    
    5,525
    
    
    
    5,868Restricted cash
    
    
    505
    
    
    
    505Deferred financing costs, net
    
    
    444
    
    
    
    519Total assets
    
    $
    35,326
    
    
    $
    46,510LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable
    
    $
    2,931
    
    
    $
    1,670Accrued research and development costs
    
    
    1,846
    
    
    
    1,303Accrued expenses  other
    
    
    2,338
    
    
    
    2,551Current portion of equipment notes payable
    
    
    237
    
    
    
    279Current portion of long-term debt
    
    
    4,322
    
    
    
    2,986Deferred revenue  current
    
    
    3,080
    
    
    
    3,232Total current liabilities
    
    
    14,754
    
    
    
    12,021Long-term debt, less current portion
    
    
    9,669
    
    
    
    10,831Other non-current liabilities
    
    
    495
    
    
    
    506Equipment notes payable, less current portion
    
    
    31
    
    
    
    66Deferred revenue  long-term
    
    
    14,635
    
    
    
    14,819Total liabilities
    
    $
    39,584
    
    
    $
    38,243Stockholders (Deficit) Equity:Common stock, $0.001 par value per share; 175,000,000 shares authorized; and 72,726,049
and 72,650,481 issued and outstanding at March 31, 2008, and
December 31, 2007, respectively
    
    
    72
    
    
    
    72Additional paid-in capital
    
    
    225,741
    
    
    
    224,819Accumulated deficit
    
    
    (230,069
    )
    
    
    (216,624
    )Accumulated other comprehensive loss
    
    
    (2
    )
    
    
    Total stockholders (deficit) equity
    
    
    (4,258
    )
    
    
    8,267Total liabilities and stockholders (deficit) equity
    
    $
    35,326
    
    
    $
    46,510
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##### Table of Contents



MEMORY PHARMACEUTICALS CORP.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 Three Months EndedMarch 31,2008
    
    
    2007Revenue
    
    $
    752
    
    
    $
    2,690Operating expenses:Research and development
    
    
    10,982
    
    
    
    9,851General and administrative
    
    
    2,874
    
    
    
    2,253Total operating expenses
    
    
    13,856
    
    
    
    12,104Loss from operations
    
    
    (13,104
    )
    
    
    (9,414
    )Other income
    
    
    24
    
    
    
    Interest:Income
    
    
    322
    
    
    
    630Expense
    
    
    (687
    )
    
    
    (79
    )Interest (expense) income, net
    
    
    (365
    )
    
    
    551Loss before income taxes
    
    
    (13,445
    )
    
    
    (8,863
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (13,445
    )
    
    $
    (8,863
    )Basic and diluted net loss per share of common stock
    
    $
    (0.18
    )
    
    $
    (0.13
    )Basic and diluted weighted average number of shares
of common stock outstanding
    
    
    72,726
    
    
    
    70,146
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MEMORY PHARMACEUTICALS CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows used in operating activities:Net loss
    
    $
    (13,445
    )
    
    $
    (8,863
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    382
    
    
    
    534Stock-based compensation
    
    
    899
    
    
    
    849Loss on sale of marketable securities
    
    
    (3
    )
    
    
    Amortization of deferred financing costs and discount on loans
    
    
    250
    
    
    
    Unrealized gain related to valuation of put option
    
    
    (11
    )
    
    
    Changes in assets and liabilities:Prepaid and other current assets
    
    
    59
    
    
    
    (1,893
    )Accounts payable
    
    
    1,261
    
    
    
    3,235Accrued expenses
    
    
    328
    
    
    
    (671
    )Deferred revenue
    
    
    (335
    )
    
    
    (1,075
    )Net cash used in operating activities
    
    
    (10,615
    )
    
    
    (7,884
    )Cash flows from investing activities:Sales of marketable securities
    
    
    4
    
    
    
    428Additions to property and equipment
    
    
    (40
    )
    
    
    (144
    )Net cash (used in) / provided by investing activities
    
    
    (36
    )
    
    
    284Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    24
    
    
    
    5,135Proceeds from issuance of loan payable and warrants
    
    
    
    
    
    
    6,000Deferred financing costs
    
    
    
    
    
    
    (440
    )Principal repayment of equipment notes payable
    
    
    (77
    )
    
    
    (235
    )Net cash (used in) / provided by financing activities
    
    
    (53
    )
    
    
    10,460Net (decrease) increase in cash and cash equivalents
    
    
    (10,704
    )
    
    
    2,860Cash and cash equivalents, beginning of period
    
    
    38,167
    
    
    
    50,849Cash and cash equivalents, end of period
    
    $
    27,463
    
    
    $
    53,709Supplemental cash flow information:Cash paid for interest
    
    
    439
    
    
    
    27Cash paid for taxes
    
    
    
    
    
    
    
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MEMORY PHARMACEUTICALS CORP.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 1)
    
    Basis of Presentation, Business Overview and LiquidityExcept as expressly indicated or unless the context otherwise requires, as used herein, the
Company, we, us, our, Memory or similar terms means Memory Pharmaceuticals Corp.The financial statements included herein have been prepared from our books and records pursuant
to generally accepted accounting principles for interim reporting and 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 (US 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, 2007.We face certain risks and uncertainties which are present in many emerging biopharmaceutical
companies. We have not completed development of any drugs, and we do not expect that any drugs
resulting from our research and development efforts will be commercially available for a
significant number of years, if at all. We will continue to seek collaboration partners to fund
a substantial portion of our research operations over the next several years. In addition, we
face risks and uncertainties regarding future profitability, ability to obtain future capital,
the conduct of our preclinical and clinical trials, the achievement of our development goals,
obtaining regulatory approvals to conduct clinical trials and to commercialize our drug
candidates, our ability to enter into, maintain and achieve milestones under collaborations, our
dependence on collaborations and our license relationships, protection of patents and property
rights, competition, rapid technological changes, government regulations including the need for
product approvals, changes in the health care marketplace, recruiting and retaining key
personnel and the performance of preclinical and clinical investigators, contract research
organizations and consultants.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.We have incurred recurring losses from operations, have limited funds, and had an accumulated
deficit of $230.1 million at March 31, 2008. We intend to continue research toward the
development of commercial products in order to generate future revenue from our programs and
from our current and future collaboration agreements.We financed our initial operations through the sale of redeemable convertible preferred stock
and subsequent to that we sold common stock in connection with our initial public offering in
April 2004, and in connection with our 2005, 2006 and 2007 Private Placements. Refer to Note 7,
2005 Private Placement, Note 8, 2006 Private Placement, and Note 9, 2007 Private
Placement.We have entered into a loan agreement with Hercules Technology Growth Capital, Inc.
(Hercules), under which we have borrowed $15.0 million, secured by our assets other than our
intellectual property (the Hercules Loan Agreement). If we default in any material respect in
the performance of any covenant contained in the Hercules Loan Agreement or an event occurs or
circumstance exists that has a material adverse effect on our business, operations, properties,
assets, condition (financial or otherwise), or prospects, or on our ability to perform our
obligations under the Hercules Loan Agreement, and such default or event or circumstance is not
cured, Hercules may be able to accelerate the maturity of our obligations. While we believe
that such a default is not likely, if Hercules accelerated the maturity of our obligations under
the Hercules Loan Agreement, absent additional funding, we cannot assure you that we would have
the funds available to repay all amounts that we have borrowed. If we were not able to repay
all amounts that we have borrowed, Hercules could, among other remedies, foreclose on our
pledged assets. Refer to Note 10, Long Term Debt.We believe that our existing cash and cash equivalents, marketable securities, together with
payments expected to be made by our collaboration partners will be sufficient to fund our
operating expenses, repayment of equipment notes, scheduled obligations under our loan from
Hercules, and capital equipment requirements into the first half of 2009. Our collaboration
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partners are not obligated to make these payments, which are contingent upon our achievement of
certain predefined milestones. Accordingly, we cannot assure you that such payments will be
received from our collaboration partners when we expect them or at all.We plan to raise additional equity or other financing and to seek funding from collaboration
partners to finance our future cash requirements. We may not be able to obtain additional
funding on acceptable terms or at all. If we are unsuccessful in our efforts to raise additional
funds, we would be required to reduce or curtail our operations and costs.On December 5, 2007, we received a Staff Deficiency Letter from the Nasdaq Stock Market which stated that for the previous 30 business days we had failed to meet the $1.00 per share minimum closing bid price requirement for continued listing on the Nasdaq Global Market, as required by Marketplace Rule 4450(a)(5).  On April 2, 2008, we received a second Staff Deficiency Letter from the Nasdaq Stock Market which stated that, in addition to failing to comply with the $1.00 per share minimum bid requirement for continued listing on the Nasdaq Global Market, based on our stockholders equity at December 31, 2007, we were no longer in compliance with the minimum $10.0 million stockholders equity requirement for continued listing on the Nasdaq Global Market under Marketplace Rule 4450(a)(3).  In the letter, the Nasdaq staff requested that we provide a plan to achieve and sustain compliance with all of the Nasdaq Global Markets continued listing requirements, including the minimum stockholders equity requirement, and the time frame required to complete the plan.  We submitted our plan to the Nasdaq staff on April 17, 2008.If the Nasdaq staff does not accept our plan to achieve compliance with the continued listing requirements, the Nasdaq staff will provide us with written notification that our common stock will be delisted from the Nasdaq Global Market.  At that time, we will have the right to appeal the delisting of our common stock, but our appeal will likely be successful only if we present a plan to the appeal hearing panel that provides substantial assurance that we will remain in compliance with all continued listing requirements of the Nasdaq Global Market, including the $1.00 per share minimum bid requirement and the $10.0 million minimum stockholders equity requirement.  Alternatively, we may apply to transfer our common stock to the Nasdaq Capital Market if we satisfy all requirements for continued listing in this market (other than the minimum bid price requirement), including having a minimum of $2.5 million in stockholders equity.  At March 31, 2008, we had a stockholders deficit of $4.3 million.  If we are eligible to transfer our common stock to the Nasdaq Capital Market and make such an election and our transfer application is approved, we will be required to regain compliance with the minimum closing bid price requirement within 180 days after June 2, 2008.  We cannot assure you that we will be successful in regaining compliance with the Nasdaq Global Market listing requirements or that, if we choose to apply for transfer to the Nasdaq Capital Market, we would be successful in our application.The accompanying financial statements have been prepared assuming that we will continue as a
going concern, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our independent registered public accounting firms report on
the audited financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007 states that the Company has incurred recurring losses from operations, has
limited funds, and has debt outstanding under an agreement which includes various provisions,
including a material adverse effect clause, that raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any adjustments that might
be necessary should we be unable to continue as a going concern.(2)
    
    Stock-Based CompensationAs of March 31, 2008 we had two stock-based compensation plans, our Amended and Restated 2004
Stock Incentive Plan (the 2004 Plan), pursuant to which we currently grant stock options,
and our Amended and Restated 2004 Employee Stock Purchase Plan (ESPP). In addition, we
granted options pursuant to our 1998 Employee, Director and Consultant Stock Option Plan (the
1998 Plan) until 2004, when our 2004 Plan was adopted. The compensation cost recognized in
the Statement of Operations for the three months ended March 31, 2008 for our stock-based
compensation plans was $0.9 million, of which $0.5 million was a component of general and
administrative expenses and $0.4 million was a component of research and development expenses.
For the three months ended March 31, 2007, we recognized compensation cost for stock-based
compensation plans of $0.8 million, of which $0.3 million was a component of general and
administrative expenses and $0.5 million was a component of research and development expenses.The weighted-average fair value of the stock option awards granted during the three month
periods ended March 31, 2008 and March 31, 2007 was $0.44 per share and $2.71 per share,
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 Ended
    
    Three Months EndedMarch 31, 2008
    
    March 31, 2007Expected life
    
    5 to 10 years
    
    5.56 to 6.06 yearsExpected volatility
    
    91.91%
    
    87.8%Risk-free interest rate
    
    2.67% to 2.94%
    
    4.74% to 4.81%Dividend yield
    
    0%
    
    0%
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For awards to employees and members of our Board of Directors, the expected life of the stock
options was calculated using the shortcut method allowed by the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment(SFAS No. 123R), and
interpreted by Staff Accounting Bulletin (SAB) No. 107. For non-employee awards, the expected
life of the stock options was based on the life of the stock option. The expected volatility
is based on the historic volatility of our publicly-traded stock which we believe will be
representative of the volatility over the expected term of the options. The risk-free interest
rate is based on the rates paid on securities issued by the U.S. Treasury with a term
approximating the expected life of the option. The dividend yield is based on the projected
annual dividend payment per share, divided by the stock price at the date of grant.A summary of the stock option activity under our 1998 Plan and our 2004 Plan during the three
month period ended March 31, 2008 is presented below.
 Exercise Price Per
    
    
    Weighted-AverageShares
    
    
    Share
    
    
    Exercise PriceOutstanding at December 31,
2007
    
    
    6,327,624
    
    
    $
    0.30  $9.82
    
    
    $
    3.16Granted
    
    
    2,205,530
    
    
    $
    0.55  $0.74
    
    
    
    0.58Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled / Forfeited
    
    
    (318,805
    )
    
    $
    0.55  $9.82
    
    
    
    2.66Outstanding at March 31, 2008
    
    
    8,214,349
    
    
    $
    0.30  $9.82
    
    
    $
    2.49
 As of March 31, 2008, there was $4.7 million of total unrecognized compensation cost related
to unvested stock options, which is expected to be recognized over a remaining
weighted-average vesting period of 2.65 years. The total grant-date fair value of stock
options vested during the three months ended March 31, 2008, was $0.9 million.On May 1, 2008, the Board of Directors approved a 200,000 share increase to the ESPP subject
to stockholder approval. The affirmative vote of a majority of shares of common stock present
or represented and entitled to vote at the 2008 annual meeting is required to approve this
increase to the ESPP. If approved by our stockholders, the amendment to the ESPP will become
effective immediately.We apply the provisions of Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services(EITF No. 96-18) to our non-employee stock-based awards. Under
EITF No. 96-18, the measurement date at which the fair value of the stock-based award is
measured is equal to the earlier of (1) the date at which a commitment for performance by the
non-employee to earn the equity instrument is reached or (2) the date at which the
non-employees performance is complete. We recognize stock-based compensation expense for the
fair value of the awards in our consolidated statements of operations. Application of EITF No.
96-18 requires us to measure the fair value of the awards as of each reporting date up to and
including the final vesting date. During the three months ended March 31, 2008, we issued
stock options to purchase 130,000 shares of common stock to non-employees.
        .(3)
    
    Net Loss Per ShareBasic net loss per share is calculated by dividing net loss 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 by the weighted average number of shares of common stock outstanding and the
dilutive potential common stock equivalents then outstanding.Since we had a net loss in each of the periods presented, basic and diluted net loss per share
is the same, because the effect of including potential common stock equivalents would be
anti-dilutive. Therefore, diluted weighted average shares outstanding exclude shares underlying
the stock options and warrants. These potential common stock equivalents are summarized as
follows:
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Three Months EndedMarch 31,2008
    
    
    2007Stock options
    
    
    8,214,349
    
    
    
    6,228,118Warrants
    
    
    6,744,769
    
    
    
    7,643,011Total
    
    
    14,959,118
    
    
    
    13,871,129
 (4)
    
    Marketable SecuritiesThe 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:
 March 31,
    
    
    December 31,2008
    
    
    2007Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss(in thousands)Mortgage-backed
and asset-backed securities due over 90 days
    
    $
    30
    
    
    $
    
    
    
    $
    34
    
    
    $
    Total marketable securities
    
    $
    30
    
    
    $
    
    
    
    $
    34
    
    
    $
    
 (5)
    
    Comprehensive Income/LossComprehensive loss, which is presented in Stockholders Equity on our balance sheets, is
calculated in accordance with SFAS No. 130, Reporting Comprehensive Income, and includes our 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 Stockholders Equity on our balance sheets. For the
three months ended March 31, 2008, comprehensive loss was $13.4 million, which includes a net
loss of $13.4 million and an immaterial unrealized loss on the sale of marketable securities.
For the three months ended March 31, 2007, comprehensive loss was $8.9 million, which includes a
net loss of $8.9 million and an immaterial unrealized gain on the sale of marketable securities.(6)
    
    License Agreements and CollaborationsHoffmann-La Roche (PDE4 Inhibitor Program)In July 2002, we entered into a collaboration agreement with F. Hoffman-La Roche Ltd./Hoffman-La
Roche, Inc., or Roche, for the development of PDE4 inhibitors (the 2002 Roche PDE4 Inhibitor
Agreement). In June 2007, in conjunction with an amendment to our Amended and Restated 2003
Roche Nicotinic Alpha-7 Agonist Agreement (as defined below), we amended and restated the 2002
Roche PDE4 Inhibitor Agreement to reacquire all development and commercialization rights to our
PDE4 inhibitor program (the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement). Under
the terms of the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement, we are obligated to
make milestone payments to Roche if we achieve specified development, regulatory and
commercialization milestones for any PDE4 inhibitors covered under the 2002 Roche PDE4 Inhibitor
Agreement. We are also obligated to pay royalties to Roche for such PDE4 inhibitors based on a
specified percentage of net sales of products, which increases at increasing net sales levels.
Through the date we entered into the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement,
Roche paid us a total of $26.0 million in connection with our PDE4 inhibitor program, comprised
of an upfront license fee of $8.0 million, research and development funding of $14.0 million and
milestone payments totaling $4.0 million.Under the terms of our 2002 Roche PDE4 Inhibitor Agreement, because we had licensed to Roche
certain intellectual property and we had continuing performance obligations, we recognized the
non-refundable upfront license fees and milestone payments received thereunder as a single unit
of accounting, recognizing revenue ratably over the estimated period of our continuing
performance obligations with respect to the first compound to be developed under that
collaboration. Solely for purposes of revenue recognition under our 2002 Roche PDE4 Inhibitor
Agreement, we estimated the relevant period of our continuing performance obligations under that
collaboration as ending in the second quarter of 2014.The amendment and restatement of the 2002 Roche PDE4 Inhibitor Agreement in June 2007 was
predicated on the execution of the amendment to the Amended and Restated 2003 Roche Nicotinic
Alpha-7 Agonist Agreement. Effective upon the execution of those agreements in June 2007, we
began recognizing the remaining $6.3 million of deferred revenue relating to the non-
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refundable upfront license fees and milestone payments received under the 2002 Roche PDE4
Inhibitor Agreement as revenue ratably over the estimated period of our continuing performance
obligations with respect to the first compound to be developed under the terms of the Amended
and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement. Solely for purposes of revenue
recognition under the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, as of
March 31, 2008, we have estimated the relevant period of our continuing performance obligations
as ending in the fourth quarter of 2013. In previous periods, the estimate of the end of the
relevant period of our continuing performance obligations under this agreement had been the
third quarter of 2013. Accordingly, in each of the three month periods ended March 31, 2008 and
2007, we recognized revenue of $0.2 million under the Amended and Restated 2002 Roche PDE4
Inhibitor Agreement.Hoffmann-La Roche (Nicotinic Alpha-7 Agonist Program)In August 2003, we entered into a collaboration with Roche for the development of nicotinic
alpha-7 agonists (the 2003 Roche Nicotinic Alpha-7 Agonist Agreement). Under the terms of the
Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, we 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 R3487/MEM 3454, for the prevention and
treatment of diseases, in all indications, for either human or veterinary use. Roche retained
the option granted under the 2003 Roche Nicotinic Alpha-7 Agonist Agreement to secure a license
to R3487/MEM 3454 upon the completion of the first Phase 2a clinical trial of R3487/MEM 3454 and
other predefined events. In May 2008, Roche exercised its license option to R3487/MEM 3454
under the terms of the 2003 Roche Nicotinic Alpha-7 Agonist Agreement, which will result in a
$6.0 million milestone payment to us in the second quarter of 2008.The 2003 Roche Nicotinic Alpha-7 Agonist Agreement was amended and restated in February 2006
(the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement). We are
collaborating with Roche in conducting certain early stage research and development activities
with respect to compounds, other than R3487/MEM 3454, being developed under this agreement, and
we are responsible for conducting Phase 1 clinical trials for such compounds. Roche is
responsible for clinical development from Phase 2a onwards and for commercialization of such
compounds.In June 2007, we further amended the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist
Agreement to, among other changes, provide that we would conduct and pay for a Phase 2a clinical
trial of R3487/MEM 3454 for the treatment of cognitive impairment associated with schizophrenia,
or CIAS (the R3487/MEM 3454 Phase 2a CIAS clinical trial), and to include a potential
milestone payment by Roche related to the completion of the R3487/MEM 3454 Phase 2a CIAS
clinical trial. Pursuant to the June 2007 amendment, in order to maintain its rights to
R3487/MEM 3454, Roche will have to make a $17.0 million milestone payment to us upon the
completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial.In February 2008, we announced plans to conduct a study of R3487/MEM 3454 on two biomarkers of
schizophrenia, P50 sensory gating and mismatch negativity, in patients with schizophrenia. The
primary objective of the trial is to study P50 sensory gating and mismatch negativity as
potential efficacy biomarkers for nicotinic alpha-7 agonists, such as R3487/MEM 3454, in
schizophrenia. External costs of the biomarker study will be funded by Roche under the Amended
and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement.Through March 31, 2008, Roche has paid us a total of $36.3 million in connection with this
collaboration, comprised of an upfront license fee of $10.0 million, research and development
funding of $10.3 million, milestone payments of $6.0 million and an equity investment of $10.0
million. In accordance with EITF No. 00-21, we are recognizing the non-refundable upfront
license fees, milestone payments, and research and development funding received under the
Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement and the remaining deferred
revenue from the Amended and Restated 2002 Roche PDE4 Inhibitor Agreement as a single unit of
accounting over the estimated period of our continuing performance obligations with respect to
the first compound to be developed under the Amended and Restated 2003 Roche Nicotinic Alpha-7
Agonist Agreement. Solely for purposes of revenue recognition under the Amended and Restated
2003 Roche Nicotinic Alpha-7 Agonist Agreement, as of March 31, 2008, we have estimated the
relevant period of our continuing performance obligations as ending in the fourth quarter of
2013. In previous periods, the estimate of the end of the relevant period of our continuing
performance obligations under this agreement had been the third quarter of 2013. Accordingly,
during the three month periods ended March 31, 2008 and 2007, we recognized revenue of $0.5
million and $0.4 million, respectively, under the Amended and Restated 2003 Roche Nicotinic
Alpha-7 Agonist Agreement.
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Amgen Inc. (PDE10 Inhibitor Program)In October 2005, we entered into a collaboration with Amgen Inc., or Amgen, for the development
of PDE10 inhibitors (the 2005 Amgen PDE10 Inhibitor Agreement). Under the terms of the
agreement, we granted to Amgen a worldwide, exclusive, sublicensable license to our PDE10
inhibitor intellectual property and to any PDE10 intellectual property jointly developed by us
and Amgen, for the prevention and treatment of diseases, in all indications, for all uses. We
have received a $5.0 million upfront fee, a $2.0 million milestone payment and $7.1 million in
research and development funding from Amgen over the initial two-year term of the collaboration
during which we and Amgen conducted a collaborative preclinical research program relating to
PDE10 inhibitors. In February 2008, the 2005 Amgen PDE10 Inhibitor Agreement was amended to
extend our commitment to the preclinical research portion of the collaboration. In connection
with the amendment, we agreed to commit and fund certain preclinical research resources and
provide Amgen increased access to our screening technologies through February 2009. In
exchange, we will receive increased milestone payments upon the achievement of certain
predefined development events for the program. In addition, the amendment expanded the scope of
compounds eligible for higher tier royalties under the agreement. We have the right to
terminate the extension of the research portion of the collaboration upon four weeks notice, in
which case the amendment will terminate and the terms of the original agreement will be
reinstated.We recognized revenue under the 2005 Amgen PDE10 Inhibitor Agreement over the initial two-year
period of the collaboration based on the level of actual research efforts expended in a period
as compared to our estimated efforts over the full period. Accordingly, during the three month
period ended March 31, 2007, we recognized revenue of $2.1 million under the 2005 Amgen PDE10
Inhibitor Agreement. We did not recognize any revenue under this agreement for the three month
period ended March 31, 2008.The Stanley Medical Research Institute (SMRI) (MEM 1003 in Bipolar Disorder)In December 2005, we entered into a development agreement with SMRI, pursuant to which we
conducted a Phase 2a bipolar disorder clinical trial of MEM 1003 (the SMRI Development
Agreement). We received an aggregate of $3.2 million in funding from SMRI, the full amount
that we were eligible to receive under the SMRI Development Agreement. We received $1.0 million
of this funding 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
expires on December 19, 2010. We received the remaining $2.2 million of funding in the form of
milestone payments. In accordance with EITF No. 00-21, we recognized the milestone payments
received from SMRI as a single unit of accounting. As of December 31, 2007, all of our
obligations and all of SMRIs predefined milestone payment obligations under the SMRI
Development Agreement were satisfied. Accordingly, we recognized the aggregate milestone
payments received from SMRI of $2.2 million as revenue during the year ended December 31, 2007.(7)
    
    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 gross proceeds of $31.0 million.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 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 2005 Private Placement. The registration statement was declared effective
on November 7, 2005 and was terminated on September 26, 2007, following the expiration of our
registration obligations.In December 2006, the FASB issued Staff Position EITF Issue No. 00-19-2, Accounting for
Registration Payment Arrangements(EITF No. 00-19-2), which amends the previously issued
accounting related to financial instruments issued with material penalty provisions for failure
to file or maintain an effective registration statement with the SEC or to be listed on a
nationally recognized stock exchange. The warrants issued in our 2005 Private Placement include
certain penalty provisions related to maintaining registration, and therefore, prior to the
adoption of EITF No. 00-19-2, were classified as a liability and recorded at fair value at each
reporting date. EITF No. 00-19-2 requires liability recognition for registration payment
arrangements, only if it is probable that these requirements will not be met, and only to the
extent of any material penalties for not meeting the requirements. EITF No. 00-19-2 was adopted
by us on January 1, 2007, and, accordingly, the effect on our financial statements was a
reclassification of the value of the warrants as of December 31, 2006. The $8.7 million warrant
liability was reclassified as a $6.8 million increase in additional paid-in capital and a $1.9
million reduction to accumulated deficit.
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(8)
    
    2006 Private PlacementOn October 5, 2006, we entered into an agreement to issue and sell in a private placement
28,232,202 shares of our common stock, at a price of $1.11 per share and warrants to purchase an
aggregate of 7,058,042 shares of our common stock, at a purchase price of $0.125 per underlying
share of common stock. The warrants issued had an exercise price of $1.33 per share and
included a net share settlement provision. The securities were sold in two tranches. The first
tranche, consisting of the sale of 23,245,724 shares of common stock and all 7,058,042 warrants,
closed on October 16, 2006 and resulted in gross proceeds of $26.7 million. The second tranche,
consisting of the sale of 4,986,478 shares of common stock, closed on December 18, 2006 and
resulted in gross proceeds of approximately $5.5 million.On November 10, 2006, certain of the investors in the 2006 Private Placement exercised their
warrants on a net share settlement basis resulting in the issuance of 1,499,224 shares of our
common stock. On February 15, 2007, we exercised our right to require exercise of the warrants
issued in connection with the 2006 Private Placement pursuant to a provision contained in the
warrants that permitted us to accelerate their exercise period if the closing price of our
common stock was above $3.00 per share for 30 consecutive trading days. During the quarter
ended March 31, 2007, all of the remaining warrants issued in the 2006 Private Placement were
exercised, some on a cashless basis, resulting in gross proceeds to us of approximately $5.0
million and the issuance of an additional 3,903,369 shares of common stock.In accordance with the terms of the Securities Purchase Agreement, pursuant to which the 2006
Private Placement was consummated, we filed a registration statement with the SEC to register
for resale the shares of common stock and the shares of common stock issuable upon the exercise
of warrants sold in the 2006 Private Placement. The registration statement was declared
effective on January 16, 2007. We are required to maintain the
effectiveness of the registration statement for a period of three years from the date of the
sale of securities in the second tranche or, if earlier, until all registered shares of common
stock may be sold within any 90 day period under Rule 144. We will be required to pay cash
penalties of 1% per month of the aggregate purchase price of securities sold under the
Securities Purchase Agreement, up to a maximum of 10%, if we do not meet our registration
obligations under the Securities Purchase Agreement. We have determined that it is not probable
that we will not meet the registration requirements of the 2006 Private Placement, and
therefore, in accordance with EITF 00-19-2, we have not recognized a liability related to such
requirements.(9)
    
    2007 Private PlacementOn June 18, 2007, we entered into a definitive Stock Purchase Agreement with SMRI and The Sylvan
C. Herman Foundation for the sale of an aggregate of up to $6.0 million of our common stock in
three equal tranches. We refer to this as our 2007 Private Placement. Under the terms of the
2007 Private Placement, the net proceeds received are required to be used to fund the R3487/MEM
3454 Phase 2a CIAS clinical trial.The first tranche of the 2007 Private Placement closed on June 20, 2007, and we sold an
aggregate of 694,444 shares of our common stock at a price of $2.88 per share, which, pursuant
to the terms of the Stock Purchase Agreement, was equal to 117% of the average closing sale
price of our common stock on the Nasdaq Global Market for the ten trading days ending on the
trading day immediately preceding the effective date of the Stock Purchase Agreement. Upon our
achievement of predefined milestones related to the R3487/MEM 3454 Phase 2a CIAS clinical trial
and subject to the satisfaction of certain closing conditions (including provisions that we have
no current intention of terminating the trial and that we are in
compliance with requirements for continued listing on Nasdaq),
we have the option, in our sole discretion, to sell to SMRI and The Sylvan C. Herman
Foundation an aggregate of $4.0 million of common stock in two tranches of $2.0 million each, at
a 17% premium to the market price at the time the milestones are achieved.In accordance with the terms of the Stock Purchase Agreement, on July 10, 2007, we filed a
registration statement with the SEC to register for resale the shares issued at the first
closing. The registration statement was declared effective on August 7, 2007. In addition, we have agreed to file a second registration statement with the SEC
registering for resale any shares sold in the second and third tranches, within 180 days after
the completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial, which registration statement
is required under the terms of the Stock Purchase Agreement to become effective within 270 days
following the completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial. We are required to
maintain the effectiveness of the registration statement(s) for a period of two years from the
last issuance of shares of common stock under the Stock Purchase Agreement or, if earlier, until
all registered shares of common stock may be sold within any 90 day period under Rule 144, which
we refer to as the Registration Period. We will be required to pay cash penalties of 1% per
month
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of the aggregate purchase price of securities sold under the Stock Purchase Agreement, up to a
maximum of 10%, if we do not meet our registration obligations under the Stock Purchase
Agreement. In addition to the registration rights described above, we have granted piggyback
registration rights, during the Registration Period, to the holders of securities acquired in
the 2007 Private Placement. We have determined that it is not probable that we will not meet the
registration requirements of the 2007 Private Placement, and therefore, in accordance with EITF
No. 00-19-2, we have not recognized a liability related to such requirements.(10)
    
    Long Term DebtIn March 2007, we entered into a $10.0 million term loan agreement with Hercules Technology
Growth Capital, Inc. (the Hercules Loan Agreement). Pursuant to the Hercules Loan Agreement,
Hercules advanced us $6.0 million in March 2007 (the First Advance). In June 2007, we entered
into the Hercules Amendment, increasing the aggregate amount that we may borrow from Hercules
from $10.0 million to $15.0 million. In connection with the Hercules Amendment, Hercules
advanced us an additional $5.0 million in June 2007 (the Second Advance). In October 2007,
Hercules advanced us the remaining $4.0 million available under the Hercules Loan Agreement (the
Third Advance).The principal balance of each advance under the Hercules Loan Agreement bears interest from the
advance date at an interest rate equal to the prime rate on the date the advance is requested
plus 3.20%. The interest rate for the First and Second Advance is 11.45%, and the interest rate
for the Third Advance is 10.95%. The Hercules Loan Agreement allows for interest-only payments
on a monthly basis through May 2008. All amounts outstanding under the Hercules Loan Agreement
as of May 16, 2008 are required to be repaid in 30 equal monthly installments of principal and
interest beginning on the first business day of June 2008. The Hercules Loan Agreement allows
us to prepay the outstanding principal amount and all accrued but unpaid interest and fees,
subject to a payment of a prepayment premium equal to (i) 2.5% of the principal prepaid if paid
on or before June 16, 2008, and (ii) 1.5% of the principal prepaid if paid any time after June
16, 2008 but before the maturity date. Once repaid, we may not reborrow any advances. Hercules
may require that all amounts outstanding under the Hercules Loan Agreement be prepaid upon a
change of control or sale of substantially all of our assets. Hercules right to require
prepayment is a derivative security, the fair value of which reduced the carrying value of the
debt. One of the key assumptions impacting the value of this derivative security is the
estimate of the likelihood of a change in control, which we currently assess as low. The debt
discount is being accreted over the term of the outstanding loan using the effective interest
method, and any change in the value of the derivative over the life of the loan is being
recognized as other income or expense. Our obligations under the Hercules Loan Agreement are
collateralized by substantially all of our assets, now owned or hereafter acquired, other than
our intellectual property. The Hercules Loan Agreement contains customary covenants that, among
other things, restrict our ability to incur indebtedness and pay cash dividends on our capital
stock. The Hercules Loan Agreement also provides for customary events of default, following
which Hercules may, at its option, accelerate the amounts outstanding under the Hercules Loan
Agreement. In addition, the Hercules Loan Agreement provides that events of default include an
event that has a material adverse effect, as defined in such agreement. We do not believe that
it is likely that the material adverse effect clause will be invoked during the period ending
March 31, 2009, and therefore we have classified the debt based on the stated maturities.In connection with the Hercules Loan Agreement, we issued Hercules a five-year warrant to
purchase 598,086 shares of our common stock at an exercise price of $2.09 per share (the First
Warrant). In connection with the Hercules Amendment, we issued to Hercules a five-year warrant
to purchase 325,521 shares of our common stock at an exercise price of $1.92 per share (the
Second Warrant, and together with the First Warrant, the Warrants).At the date of the initial advance, the fair value of the First Warrant was $0.9 million
and at the date of the second advance, the fair value of the Second Warrant was $0.6 million.
These amounts were credited to additional paid-in capital and reduced the carrying value of the
debt. The debt discount is being accreted over the term of the outstanding loan using the
effective interest method. The fair value of the Warrants was determined using the
Black-Scholes model. The following assumptions were used for the First Warrant: dividend yield
of 0%, estimated volatility of 87.78%, risk free interest rate of 4.47%, and an expected life of
five years. The following assumptions were used for the Second Warrant: dividend yield of 0%,
estimated volatility of 89.85%, risk free interest rate of 5.07%, and an expected life of five
years.The loan includes a deferred interest payment of 3% of the amount borrowed under the Hercules
Loan Agreement, which is payable on the maturity date. The deferred interest payment due at
maturity, amounting to $0.5 million, is classified as Other non-current liabilities on the
balance sheet at March 31, 2008 and December 31, 2007. The corresponding costs deferred are
included in deferred financing costs and amortized to interest expense over the term of the
loan. In connection with the
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Hercules Loan Agreement, we incurred $0.3 million of additional deferred financing costs. These
costs are also being amortized over the term of the loan.In accordance with the terms of the Second Warrant, on July 10, 2007, we filed a registration
statement with the SEC to register for resale the shares of common stock underlying the Warrants
issued by us to Hercules in connection with entering into the Hercules Loan Agreement. The
registration statement was declared effective on August 7, 2007. Under
the terms of the Second Warrant and except as otherwise permitted under the Hercules Amendment,
the registration statement must remain effective through June 18, 2009 or, if earlier, until all
registered shares of common stock may be sold under Rule 144 during any 90 day period. We will
be required to pay cash penalties of 1% per month of the aggregate exercise price of the
Warrants, up to a maximum of 10%, if we do not meet our registration obligations under the
Second Warrant. We have determined that it is not probable that we will not meet the
registration requirements set forth in the Second Warrant and therefore, in accordance with EITF
No. 00-19-2, we have not recognized a liability related to such requirement.(11)
    
    RestructuringOn March 12, 2008, we announced a reduction in workforce. We accounted for these restructuring
costs pursuant to SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. As a result, for the three months ended March 31, 2008, we recorded an aggregate
charge of $0.4 million for employee severance and outplacement costs, of which $0.3 million has
been included in research and development costs. The restructuring costs will be paid during
the period of March through September 2008. Therefore, an accrued liability of $0.3 million was
recognized on the balance sheet as of March 31, 2008. The following table summarizes the
restructuring accrual for the three months ended March 31, 2008.
 (In Thousands)Balance at
    
    
    
    
    
    
    
    
    
    
    Balance at MarchDecember 31, 2007
    
    
    Charges
    
    
    Payments
    
    
    31, 2008Severance costs
    
    $
    
    
    
    $
    327
    
    
    $
    36
    
    
    $
    291Other restructuring costs
    
    
    
    
    
    
    31
    
    
    
    16
    
    
    
    15Total restructuring costs
    
    $
    
    
    
    $
    358
    
    
    $
    52
    
    
    $
    306
 (12)
    
    Fair Value MeasurementEffective January 1, 2008, we implemented SFAS No. 157, Fair Value Measurement(SFAS No. 157),
for our financial assets and liabilities that are re-measured and reported at fair value at each
reporting period, and non-financial assets and liabilities that are re-measured and reported at
fair value at least annually. In accordance with the provisions of FSP No. FAS 157-2, Effective
Date of FASB Statement No. 157,we have elected to defer implementation of SFAS No. 157 as it
relates to our non-financial assets and non-financial liabilities that are recognized and
disclosed at fair value in the financial statements on a nonrecurring basis until January 1,
2009. We are evaluating the impact, if any, SFAS No. 157 will have on our non-financial assets
and liabilities. The adoption of SFAS No. 157 to our financial assets and liabilities and
non-financial assets and liabilities that are re-measured and reported at fair value at least
annually did not have an impact on our financial results.As defined in SFAS No. 157, fair value is based on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. In order to increase consistency and comparability in fair value
measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are described
below:
 Level 1:
    
    Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.Level 2:
    
    Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.Level 3:
    
    Unobservable inputs are used when little or no market data is available. The
fair value hierarchy gives the lowest
priority to Level 3 inputs.
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In determining fair value, we utilize valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs to the extent possible in our assessment of
fair value. Financial assets and liabilities carried at fair value as of March 31, 2008 are
classified in the table below in one of the three categories described above (in thousands):
 March 31, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash equivalents
    
    $
    23,016
    
    
    $
    23,016
    
    
    
    
    
    
    
    Marketable securities
    
    
    30
    
    
    
    30
    
    
    
    
    
    
    
    Total
    
    $
    23,046
    
    
    $
    23,046
    
    
    
    
    
    
    
    Liabilities:Put option
    
    $
    45
    
    
    
    
    
    
    
    
    
    
    $
    45Total
    
    $
    45
    
    
    
    
    
    
    
    
    
    
    $
    45
 Fair Value Measurements Using Significant Unobservable Inputs
(Level 3) (in thousands)
 DerivativesBalance at December 31, 2007
    
    $
    56Unrealized gains included in earnings
    
    
    (11
    )Balance at March 31, 2008
    
    $
    45The amount of total gains or losses for
the period included in earnings (or
changes in net assets) attributable to the
change in unrealized gains or losses
relating to assets still held at the
reporting date
    
    $
    (11
    )
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   OVERVIEW
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6
     Nicotinic Alpha-7 Agonist ProgramOur nicotinic alpha-7 receptor program is being conducted pursuant to a collaboration with
Roche, which we entered into in August 2003 and subsequently amended and restated in February
2006 (the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement). Under the
terms of the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, we granted
to Roche a worldwide, exclusive, sublicensable license to all of our patent rights and
know-how with respect to our nicotinic alpha-7 agonists, other than R3487/MEM 3454, for the
prevention and treatment of diseases, in all indications, for either human or veterinary use.
In May 2008, Roche exercised its license option to R3487/MEM 3454, which will result in a
$6.0 million milestone payment to us in the second quarter of 2008.We have collaborated with Roche in conducting certain early stage research and development
activities with respect to compounds being developed under this agreement, and we are
responsible for conducting Phase 1 clinical trials for such compounds. Roche is responsible
for clinical development from Phase 2a onwards and for commercialization of such compounds.
We are eligible to receive milestone payments upon our achievement of specified development,
regulatory and commercialization milestones (including sales level milestones) for compounds
that are developed under the agreement.R3487/MEM 3454, a partial agonist of the nicotinic alpha-7 receptor, is the lead candidate
from our nicotinic alpha-7 agonist program and is being developed for the treatment of
Alzheimers disease and cognitive impairment associated with schizophrenia. In November
2007, we announced positive top-line data from a Phase 2a trial that evaluated the safety and
efficacy of R3487/MEM 3454 in patients with mild to moderate Alzheimers disease. R3487/MEM
3454 demonstrated a statistically significant effect on cognition at the 5 milligram and 15
milligram doses on both the primary and key secondary endpoints for that trial.In June 2007, we further amended the Amended and Restated 2003 Roche Nicotinic Alpha-7
Agonist Agreement to, among other changes, provide that we would conduct and pay for a Phase
2a clinical trial of R3487/MEM 3454 in CIAS, which we refer to as the R3487/MEM 3454 Phase 2a
CIAS clinical trial. In December 2007, we commenced the R3487/MEM 3454 Phase 2a CIAS
clinical trial. Roche is obligated to make a $17.0 million milestone payment to us upon the
completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial.The R3487/MEM 3454 Phase 2a CIAS clinical trial is being funded in part through our stock
purchase agreement with SMRI and The Sylvan C. Herman Foundation, pursuant to which we have
agreed to sell up to an aggregate of $6.0 million of our common stock in three equal
tranches. We refer to this as our 2007 Private Placement. The first tranche of the 2007
Private Placement closed in June 2007. Upon our achievement of predefined milestones related
to the R3487/MEM 3454 Phase 2a CIAS clinical trial and subject to the satisfaction of certain
closing conditions (including provisions that we have no current intention of terminating the
trial and that we are in compliance with requirements for continued
listing on Nasdaq), we have the option, in our sole
discretion, to sell to SMRI and The Sylvan C. Herman Foundation an aggregate of $4.0 million
of common stock in two tranches of $2.0 million each, at a 17% premium to the market price at
the time the milestone is achieved.In February 2008, we announced plans to conduct a study of R3487/MEM 3454 on two biomarkers
of schizophrenia, P50 sensory gating and mismatch negativity, in patients with schizophrenia.
The primary objective of the trial is to study P50 sensory gating and mismatch negativity as
potential efficacy biomarkers for nicotinic alpha-7 agonists, such as R3487/MEM 3454, in
schizophrenia. External costs of the biomarker study will be funded by Roche under the
Amended and Restated 2003 Nicotinic Alpha-7 Agonist Agreement.R4996/MEM 63908 is the second drug candidate to be nominated from our nicotinic alpha-7
agonist program and is also a partial agonist of the nicotinic alpha-7 receptor. We
commenced a Phase 1 program for R4996/MEM 63908 in August 2007 under a Clinical Trial
Application that we filed with Health Canada. We have completed the single ascending dose
study portion of the program and are currently conducting studies investigating the effect of
food on pharmacokinetic
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    PDE4 Inhibitor Program
      PDE10 Inhibitor Program
      5-HT6Antagonist Program
 6 6 6 6
     L-Type Calcium Channel Modulator
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CRITICAL ACCOUNTING POLICIES
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Use of estimates
  Revenue recognition
 Revenue Recognition, Accounting for Revenue Arrangements with Multiple Deliverables ,
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Accrued expenses
  
    
    professional service fees, such as attorneys and accountants fees;
    
    preclinical and clinical contract research organization fees;
    
    fees to be paid to data management organizations and investigators in conjunction with clinical trials; and
    
    fees to be paid to contract manufacturers in conjunction with the production of the
supply of our drug candidates for preclinical and clinical trials.
  Research and development expense
  Stock-based payment arrangements
 Accounting for Stock Issued to Employees
 , Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
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Valuation of Hercules put option
  Classification of Hercules debt
  NEW ACCOUNTING PRONOUNCEMENTS
 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Disclosures about Derivative Instruments and Hedging
Activities
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RESULTS OF OPERATIONS
 Three Months Ended March 31, 2008 compared to Three Months Ended March 31, 2007
 Revenue
   Research and development expense
 6
 General and administrative expense
  Interest income and interest expense
  Liquidity and capital resources
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.
   
    
    the number of compounds and drug candidates that we advance into or through the development process;
    
    the funding we receive from our collaborations;
    
    the scope and results of our and our collaborators clinical trials;
    
    potential in-licensing or acquisition of other compounds or technologies;
    
    the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;
    
    the timing of, and the costs involved in, obtaining regulatory approvals;
    
    the availability of third parties, and the cost, to manufacture our drug candidates
for preclinical and clinical trial supply;
    
    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; and
    
    the cost of commercialization activities, including product marketing, sales and
distribution.
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Item 4T. 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, 2007
(the 2007 Annual Report), which could materially affect
our business, financial condition or future results. The risks
described in our 2007 Annual Report, 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, may also materially adversely affect our
business, financial condition and/or operating results. The risk
factor set forth below replaces in its entirety the risk factor
from our 2007 Annual Report entitled: We are currently
not in compliance with Nasdaq rules regarding the minimum bid price
and are at risk of being delisted from the Nasdaq Global Market,
which may subject us to the SECs penny stock rules and decrease
the liquidity of our common stock.
 We
are currently not in compliance with Nasdaq rules for continued
listing on the Nasdaq Global Market and are at risk of being
delisted, which may subject us to the SECs penny stock rules
and decrease the liquidity of our common stock.
     26




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##### Table of Contents



Item 5. Other Information
   
 Item 6. Exhibits
 10.1*
    
    Third Amendment to Amended and Restated Strategic Alliance Agreement
(Nicotinic Alpha-7 Program) dated as of January 14, 2008, by and
among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc. and the
Registrant.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 Chief 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
 
 *
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC. 27




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##### Table of Contents



SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:
    /s/ Vaughn M. KailianVaughn M. KailianPresident and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)  28




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##### Table of Contents



Exhibit Index
 10.1*
    
    Third Amendment to Amended and Restated Strategic Alliance Agreement
(Nicotinic Alpha-7 Program) dated as of January 14, 2008, by and
among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc. and the
Registrant.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 Chief 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
 
 *
    
    Confidential treatment requested as to certain portions, which portions are omitted and filed
separately with the SEC. 29