##### 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 September 30, 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
    
    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)
 (Registrants Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller reporting company þ
  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
    
    
    17Item 4T. Controls and Procedures
    
    
    28Part II. Other Information.
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MEMORY PHARMACEUTICALS CORP.
 
 BALANCE SHEETS
 (unaudited)
 (in thousands, except for share and per share amounts)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,024
    
    
    $
    38,167Marketable securities
    
    
    
    
    
    
    34Accounts receivable
    
    
    7,042
    
    
    
    54Prepaid and other current assets
    
    
    1,307
    
    
    
    1,363Total current assets
    
    
    22,373
    
    
    
    39,618Property and equipment, net
    
    
    4,696
    
    
    
    5,868Restricted cash
    
    
    505
    
    
    
    505Deferred financing costs, net
    
    
    296
    
    
    
    519Total assets
    
    $
    27,870
    
    
    $
    46,510LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable
    
    $
    2,196
    
    
    $
    1,670Accrued research and development costs
    
    
    4,407
    
    
    
    1,303Accrued expenses  other
    
    
    2,652
    
    
    
    2,551Current portion of equipment notes payable
    
    
    121
    
    
    
    279Current portion of long-term debt
    
    
    5,442
    
    
    
    2,986Other current liabilities
    
    
    3,169
    
    
    
    Deferred revenue  current
    
    
    22,576
    
    
    
    3,232Total current liabilities
    
    
    40,563
    
    
    
    12,021Long-term debt, less current portion
    
    
    7,129
    
    
    
    10,831Other non-current liabilities
    
    
    736
    
    
    
    506Equipment notes payable, less current portion
    
    
    8
    
    
    
    66Deferred revenue  long-term
    
    
    
    
    
    
    14,819Total liabilities
    
    
    48,436
    
    
    
    38,243Stockholders (Deficit) Equity:Common stock, $0.001 par value per share; 175,000,000 shares authorized; and 82,243,050
and 72,650,481 issued and outstanding at September 30, 2008, and December 31, 2007,
respectively
    
    
    82
    
    
    
    72Additional paid-in capital
    
    
    230,767
    
    
    
    224,819Accumulated deficit
    
    
    (251,415
    )
    
    
    (216,624
    )Total stockholders (deficit) equity
    
    
    (20,565
    )
    
    
    8,267Total liabilities and stockholders (deficit) equity
    
    $
    27,870
    
    
    $
    46,510
   3




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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    4,339
    
    
    $
    5,026
    
    
    $
    6,038
    
    
    $
    10,444Operating expenses:Research and development
    
    
    10,324
    
    
    
    8,988
    
    
    
    31,558
    
    
    
    30,096General and administrative
    
    
    2,273
    
    
    
    2,259
    
    
    
    7,725
    
    
    
    7,104Total operating expenses
    
    
    12,597
    
    
    
    11       ,247
    
    
    
    39,283
    
    
    
    37,200Loss from operations
    
    
    (8,258
    )
    
    
    (6,221
    )
    
    
    (33,245
    )
    
    
    (26,756
    )Other (expense) income
    
    
    (159
    )
    
    
    
    
    
    
    (130
    )
    
    
    Interest:Income
    
    
    109
    
    
    
    598
    
    
    
    586
    
    
    
    1,877Expense
    
    
    (633
    )
    
    
    (559
    )
    
    
    (2,002
    )
    
    
    (847
    )Interest (expense) income, net
    
    
    (524
    )
    
    
    39
    
    
    
    (1,416
    )
    
    
    1,030Loss before income taxes
    
    
    (8,940
    )
    
    
    (6,182
    )
    
    
    (34,791
    )
    
    
    (25,726
    )Income taxes
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    3Net loss
    
    $
    (8,940
    )
    
    $
    (6,179
    )
    
    $
    (34,791
    )
    
    $
    (25,729
    )Basic and diluted net loss per
share of common stock
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.46
    )
    
    $
    (0.36
    )Basic and diluted weighted
average number of shares of
common stock outstanding
    
    
    79,373
    
    
    
    72,610
    
    
    
    75,077
    
    
    
    71,618
   4




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MEMORY PHARMACEUTICALS CORP.
 
 STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows used in operating activities:Net loss
    
    $
    (34,791
    )
    
    $
    (25,729
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,213
    
    
    
    1,476Stock-based compensation
    
    
    1,899
    
    
    
    2,259Loss on sale of marketable securities
    
    
    11
    
    
    
    Amortization of deferred financing costs and discount on loans
    
    
    732
    
    
    
    384Unrealized loss related to valuation of put option
    
    
    136
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    (6,988
    )
    
    
    (20
    )Prepaid and other current assets
    
    
    56
    
    
    
    (344
    )Other assets
    
    
    
    
    
    
    4Accounts payable
    
    
    526
    
    
    
    1,873Accrued expenses
    
    
    3,205
    
    
    
    (2,430
    )Other current liabilities
    
    
    3,169
    
    
    
    Deferred revenue
    
    
    4,525
    
    
    
    (2.598
    )Other non-current liabilities
    
    
    95
    
    
    
    Net cash used in operating activities
    
    
    (26,212
    )
    
    
    (25,125
    )Cash flows from investing activities:Sales of marketable securities
    
    
    23
    
    
    
    425Additions to property and equipment
    
    
    (41
    )
    
    
    (374
    )Net cash (used in) / provided by investing activities
    
    
    (18
    )
    
    
    51Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    4,059
    
    
    
    7,262Proceeds from issuance of loan payable and warrants
    
    
    
    
    
    
    11,000Deferred financing costs
    
    
    
    
    
    
    (261
    )Principal repayment of equipment notes payable
    
    
    (216
    )
    
    
    (589
    )Principal repayment of long-term debt
    
    
    (1,756
    )
    
    
    Net cash provided by financing activities
    
    
    2,087
    
    
    
    17,412Net decrease in cash and cash equivalents
    
    
    (24,143
    )
    
    
    (7,662
    )Cash and cash equivalents, beginning of period
    
    
    38,167
    
    
    
    50,849Cash and cash equivalents, end of period
    
    $
    14,024
    
    
    $
    43,187Supplemental cash flow information:Cash paid for interest
    
    
    1,292
    
    
    
    681Cash paid for taxes
    
    
    
    
    
    
    3
   5




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MEMORY PHARMACEUTICALS CORP.
 
 NOTES TO FINANCIAL STATEMENTS (unaudited)
 1)
    
    Basis of Presentation,
Business Overview and Liquidity
          6




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(2)
    
    Stock-Based Compensation
   7




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Nine Months Ended
    
    Nine Months EndedSeptember 30, 2008
    
    September 30, 2007Expected life
    
    5.00 to 10.00 years
    
    5.56 to 10.00 yearsExpected volatility
    
    91.91% to 93.94%
    
    87.5% to 89.5%Risk-free interest rate
    
    2.67% to 3.73%
    
    4.41% to 5.03%Dividend yield
    
    0%
    
    0%
 Share-Based Payment
  Exercise Price
    
    Weighted-AverageShares
    
    
    Per Share
    
    Exercise PriceOutstanding at December
31, 2007
    
    
    6,327,624
    
    
    $0.30       -       $9.82
    
    $
    3.16Granted
    
    
    2,284,530
    
    
    $0.36       -       $0.74
    
    $
    0.58Exercised
    
    
    (166
    )
    
    $0.54
    
    $
    0.54Cancelled / Forfeited
    
    
    (680,640
    )
    
    $0.30       -       $9.82
    
    $
    2.89Outstanding at
September 30, 2008
    
    
    7,931,348
    
    
    $0.36       -       $9.82
    
    $
    2.44
   , Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services
  8




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(3)
    
    Net Loss Per Share
   September 30,2008
    
    
    2007Stock options
    
    
    7,931,348
    
    
    
    6,731,805Warrants
    
    
    6,637,156
    
    
    
    6,744,769Total
    
    
    14,568,504
    
    
    
    13,476,574
 (4)
    
    Marketable Securities
  September 30,
    
    
    December 31,2008
    
    
    2007Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss(in thousands)Mortgage-backed and asset-backed securities
due over 90 days
    
    $
    
    
    
    $
    
    
    
    $
    34
    
    
    $
    Total marketable securities
    
    $
    
    
    
    $
    
    
    
    $
    34
    
    
    $
    
 (5)
    
    Comprehensive Income/Loss
 Reporting Comprehensive Income
 (6)
    
    License Agreements and Collaborations
 Hoffmann-La Roche (PDE4 Inhibitor Program)
   9




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Hoffmann-La Roche (Nicotinic Alpha-7 Agonist Program)
     10




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11




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Amgen Inc. (PDE10 Inhibitor Program)
   The Stanley Medical Research Institute (SMRI ) (MEM 1003 in Bipolar Disorder)
  (7)
    
    2005 Private Placement
   Accounting for
Registration Payment Arrangements
  12




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(8)
    
    2006 Private Placement
    (9)
    
    2007 Private Placement
     13




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(10)
    
    Long-Term Debt
        14




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(11)
    
    Restructuring
  September 2008 Activities
   (In Thousands)Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    
    
    
    
    Changes in
    
    
    September 30,2007
    
    
    Charges
    
    
    Payments
    
    
    Estimates
    
    
    2008Severance costs
    
    $
    
    
    
    $
    1,372
    
    
    $
    (26
    )
    
    $
    
    
    
    $
    1,346Other restructuring costs
    
    
    
    
    
    
    113
    
    
    
    (6
    )
    
    
    
    
    
    
    107Total restructuring costs
    
    $
    
    
    
    $
    1,485
    
    
    $
    (32
    )
    
    $
    
    
    
    $
    1,453
 March 2008 Activities
  (In Thousands)Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    
    
    
    
    Changes in
    
    
    September 30,2007
    
    
    Charges
    
    
    Payments
    
    
    Estimates
    
    
    2008Severance costs
    
    $
    
    
    
    $
    327
    
    
    $
    (327
    )
    
    $
    
    
    
    $
    Other restructuring costs
    
    
    
    
    
    
    31
    
    
    
    (18
    )
    
    
    (13
    )
    
    
    Total restructuring costs
    
    $
    
    
    
    $
    358
    
    
    $
    (345
    )
    
    $
    (13
    )
    
    $
    
  15




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Combined 2008 Activities
    (In Thousands)Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    
    
    
    
    Changes in
    
    
    September 30,2007
    
    
    Charges
    
    
    Payments
    
    
    Estimates
    
    
    2008Severance costs
    
    $
    
    
    
    $
    1,699
    
    
    $
    (353
    )
    
    $
    
    
    
    $
    1,346Other restructuring costs
    
    
    
    
    
    
    144
    
    
    
    (24
    )
    
    
    (13
    )
    
    
    107Total restructuring costs
    
    $
    
    
    
    $
    1,843
    
    
    $
    (377
    )
    
    $
    (13
    )
    
    $
    1,453
 (12)
    
    Fair Value Measurement
 Fair Value Measurement Effective
Date of FASB Statement No. 157,
      September 30, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash equivalents
    
    $
    10,763
    
    
    $
    10,763
    
    
    $
    
    
    
    $
    Total
    
    $
    10,763
    
    
    $
    10,763
    
    
    $
    
    
    
    $
    Liabilities:Put option
    
    $
    192
    
    
    $
    
    
    
    $
    
    
    
    $
    192Total
    
    $
    192
    
    
    $
    
    
    
    $
    
    
    
    $
    192
  16




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Fair Value Measurements Using Significant Unobservable Inputs(Level 3) (in thousands)DerivativesBeginning balance at December 31, 2007
    
    $
    56Unrealized losses included in operations
    
    
    136Balance at September 30, 2008
    
    $
    192The amount of total gains or losses for the
nine-month period included in operations
(or changes in net assets) attributable to
the change in unrealized gains or losses
relating to assets still held at the
reporting date
    
    $
    136
 (13)
    
    Sublease
   (14)
    
    Commitments and Contingencies Employment Arrangements
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   OVERVIEW
   17




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6 6
  Nicotinic Alpha-7 Agonist Program
       18




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 PDE4 Inhibitor Program
   PDE10 Inhibitor Program
   19




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 5-HT 6 Antagonist Program
 6 6 6 6 6 6
  L-Type Calcium Channel Modulator
         20




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CRITICAL ACCOUNTING POLICIES
   Use of estimates
  Revenue recognition
 Revenue Recognition, Accounting for Revenue Arrangements with Multiple Deliverables ,
   21




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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
   22




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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
   Valuation of Hercules put option
  Classification of Hercules debt
   23




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Registration payment arrangements
  Accounting for Registration Payment Arrangements Accounting for Contingencies, Reasonable Estimation of the
Amount of a Loss
  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
 RESULTS OF OPERATIONS
 Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007
 Revenue
   24




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Research and development expense
 6
 General and administrative expense
  Interest income and interest expense
  Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007
 Revenue
   Research and development expense
 6
  25




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General and administrative expense
  Interest income and interest expense
  Liquidity and capital resources
        26




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.
    27




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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.
  
 Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Form 10-Q.
 Change in internal control over financial reporting
  Limitations on the effectiveness of controls
   28




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PART II. OTHER INFORMATION.
 
 Item 1A. Risk Factors
 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.
 We are currently not in compliance with Nasdaq rules for continued listing on the NASDAQ Capital
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.
      29




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Item 6. Exhibits
 10.1
    
    
    Amended and Restated Employment Agreement, dated September 30, 2008,
by and between the Registrant and James R. Sulat.10.2
    *
    
    Fourth Amendment to Amended and Restated Strategic Alliance
Agreement (Nicotinic Alpha-7 Program) dated July 15, 2008, by and
among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc. and the
Registrant.10.3
    *
    
    Fifth Amendment to Amended and Restated Strategic Alliance Agreement
(Nicotinic Alpha-7 Program) dated September 15, 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.  30




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SIGNATURES
  MEMORY PHARMACEUTICALS CORP.By:
    /s/ Vaughn M. KailianVaughn M. KailianPresident and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)   31




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Exhibit Index
 10.1
    
    
    Amended and Restated Employment Agreement, dated September 30, 2008,
by and between the Registrant and James R. Sulat.10.2
    *
    
    Fourth Amendment to Amended and Restated Strategic Alliance
Agreement (Nicotinic Alpha-7 Program) dated July 15, 2008, by and
among F. Hoffmann-La Roche Ltd., Hoffmann La-Roche Inc. and the
Registrant.10.3
    *
    
    Fifth Amendment to Amended and Restated Strategic Alliance Agreement
(Nicotinic Alpha-7 Program) dated September 15, 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.  32