UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 000-50642
Memory Pharmaceuticals Corp.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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04-3363475
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(State or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S. Employer Identification No.)
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100 Philips Parkway, Montvale, New Jersey
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07645
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(Address of Principal Executive Offices)
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(Zip Code)
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(201) 802-7100
(Registrants Telephone Number, Including Area Code)
None.
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, or a smaller reporting company. See definitions of accelerated
filer, large accelerated filer and smaller reporting company.
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Large Accelerated Filer
o
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
As of November 1, 2008, the registrant had 82,243,050 shares of common stock, $0.001 par value per
share, outstanding.
MEMORY PHARMACEUTICALS CORP.
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEMORY PHARMACEUTICALS CORP.
BALANCE SHEETS
(unaudited)
(in thousands, except for share and per share amounts)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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14,024
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$
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38,167
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Marketable securities
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34
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Accounts receivable
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7,042
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54
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Prepaid and other current assets
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1,307
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1,363
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Total current assets
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22,373
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39,618
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Property and equipment, net
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4,696
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5,868
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Restricted cash
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505
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505
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Deferred financing costs, net
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296
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519
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Total assets
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$
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27,870
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$
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46,510
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LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
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Current liabilities:
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Accounts payable
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$
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2,196
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$
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1,670
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Accrued research and development costs
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4,407
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1,303
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Accrued expenses other
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2,652
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2,551
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Current portion of equipment notes payable
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121
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279
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Current portion of long-term debt
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5,442
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2,986
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Other current liabilities
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3,169
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Deferred revenue current
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22,576
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3,232
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Total current liabilities
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40,563
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12,021
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Long-term debt, less current portion
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7,129
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10,831
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Other non-current liabilities
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736
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506
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Equipment notes payable, less current portion
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8
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66
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Deferred revenue long-term
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14,819
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Total liabilities
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48,436
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38,243
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Stockholders (Deficit) Equity:
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Common stock, $0.001 par value per share; 175,000,000 shares authorized; and 82,243,050
and 72,650,481 issued and outstanding at September 30, 2008, and December 31, 2007,
respectively
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82
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72
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Additional paid-in capital
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230,767
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224,819
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Accumulated deficit
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(251,415
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)
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(216,624
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)
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Total stockholders (deficit) equity
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(20,565
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)
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8,267
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Total liabilities and stockholders (deficit) equity
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$
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27,870
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$
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46,510
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See accompanying notes to financial statements.
3
MEMORY PHARMACEUTICALS CORP.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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Revenue
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$
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4,339
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$
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5,026
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$
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6,038
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$
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10,444
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Operating expenses:
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Research and development
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10,324
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8,988
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31,558
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30,096
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General and administrative
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2,273
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2,259
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7,725
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7,104
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Total operating expenses
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12,597
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11 ,247
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39,283
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37,200
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Loss from operations
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(8,258
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(6,221
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(33,245
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)
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(26,756
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Other (expense) income
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(159
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)
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(130
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)
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Interest:
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Income
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109
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598
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586
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1,877
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Expense
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(633
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(559
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(2,002
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(847
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Interest (expense) income, net
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(524
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)
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39
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(1,416
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1,030
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Loss before income taxes
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(8,940
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)
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(6,182
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)
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(34,791
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(25,726
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Income taxes
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(3
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)
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3
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Net loss
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$
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(8,940
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)
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$
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(6,179
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)
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$
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(34,791
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)
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$
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(25,729
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)
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Basic and diluted net loss per
share of common stock
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$
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(0.11
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)
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$
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(0.09
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)
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$
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(0.46
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$
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(0.36
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Basic and diluted weighted
average number of shares of
common stock outstanding
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79,373
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72,610
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75,077
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71,618
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See accompanying notes to financial statements.
4
MEMORY PHARMACEUTICALS CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Nine Months Ended
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September 30,
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2008
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2007
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Cash flows used in operating activities:
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Net loss
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$
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(34,791
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)
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$
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(25,729
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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1,213
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1,476
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Stock-based compensation
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1,899
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2,259
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Loss on sale of marketable securities
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11
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Amortization of deferred financing costs and discount on loans
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732
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384
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Unrealized loss related to valuation of put option
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136
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Changes in assets and liabilities:
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Receivables
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(6,988
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)
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(20
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)
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Prepaid and other current assets
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56
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(344
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)
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Other assets
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4
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Accounts payable
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526
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1,873
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Accrued expenses
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3,205
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(2,430
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)
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Other current liabilities
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3,169
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|
|
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Deferred revenue
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4,525
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(2.598
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)
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Other non-current liabilities
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95
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|
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Net cash used in operating activities
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(26,212
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)
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(25,125
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)
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Cash flows from investing activities:
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Sales of marketable securities
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23
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425
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Additions to property and equipment
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(41
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)
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(374
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)
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Net cash (used in) / provided by investing activities
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(18
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)
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51
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Cash flows provided by financing activities:
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Proceeds from issuance of common stock
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4,059
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7,262
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Proceeds from issuance of loan payable and warrants
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11,000
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Deferred financing costs
|
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|
|
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(261
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)
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Principal repayment of equipment notes payable
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(216
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)
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(589
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)
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Principal repayment of long-term debt
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(1,756
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)
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|
|
|
|
|
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|
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Net cash provided by financing activities
|
|
|
2,087
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|
|
|
17,412
|
|
|
|
|
|
|
|
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Net decrease in cash and cash equivalents
|
|
|
(24,143
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)
|
|
|
(7,662
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)
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Cash and cash equivalents, beginning of period
|
|
|
38,167
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|
|
|
50,849
|
|
|
|
|
|
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Cash and cash equivalents, end of period
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$
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14,024
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$
|
43,187
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|
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|
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Supplemental cash flow information:
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Cash paid for interest
|
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|
1,292
|
|
|
|
681
|
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Cash paid for taxes
|
|
|
|
|
|
|
3
|
|
See accompanying notes to financial statements.
5
MEMORY PHARMACEUTICALS CORP.
NOTES TO FINANCIAL STATEMENTS (unaudited)
1)
|
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Basis of Presentation,
Business Overview and Liquidity
|
Except 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 $251.4 million at September 30, 2008. We intend to continue 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 $13.2 million of principal outstanding as of September 30,
2008, which is 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, 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
6
from Hercules, and capital equipment requirements into the first half of 2009. Our
collaboration 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. However, 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). On June 6, 2008, we received a
letter from the Nasdaq Stock Market notifying us that, because we had not regained compliance
with the $1.00 bid price requirement set forth in Marketplace Rule 4450(a) (5), our securities
were subject to delisting from the NASDAQ Global Market, unless we requested a hearing. We
requested a hearing before the Nasdaq Listing Qualifications Panel (the Panel), which
automatically stayed the delisting of our securities. On June 13, 2008, our stockholders
approved an amendment to our Amended and Restated Certificate of Incorporation to effect a
reverse stock split of our common stock at a specific ratio within the range of 1:2 and 1:10, to
be determined by our Board of Directors, in its sole discretion, within a twelve-month period
following stockholder approval. On July 31, 2008, we appeared before the Panel and presented our
plan to achieve and sustain compliance with the continued listing requirements of the Nasdaq
Stock Market, which included a request to transfer our listing to the NASDAQ Capital Market. On
October 24, 2008, the Nasdaq Listing Qualifications Panel approved our request to transfer to
the NASDAQ Capital Market, subject to an extension to comply with the continued listing
requirements, and on October 28, 2008, we began trading on the NASDAQ Capital Market. The Panel
has granted us an extension through December 3, 2008 to comply with the $35.0 million market
capitalization requirement or the alternative requirement of $2.5 million in stockholders
equity. In addition, the Panel notified us that as a result of the bid price moratorium
announced by the NASDAQ Stock Market on October 16, 2008, in the event we achieve compliance
with the other continued listing requirements of the NASDAQ Capital Market by December 3, 2008,
we will have through February 2, 2009 to comply with the $1.00 minimum bid price requirement of
the NASDAQ Capital Market.
We cannot assure you that we will be successful in achieving and sustaining compliance with the
continued listing requirements of the Nasdaq Capital Market in the time frame defined by the
Panel. If we do not achieve compliance with these requirements in the timeframe defined by the
Panel, the Panel will provide us with written notification that our common stock will be
delisted. If our common stock is delisted from the Nasdaq Capital Market, there may be a
limited market for our stock, trading in our stock may become more difficult and our share price
could decrease even further. In addition, if our common stock is delisted, our ability to raise
additional capital may be impaired.
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 firms 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 Compensation
|
As of September 30, 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 Second 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 September 30, 2008,
for our stock-based compensation plans was $0.5 million, of which $0.3 million was a component
of general and administrative expenses and $0.2 million was a component of research and
development expenses. For the three months ended September 30, 2007, we recognized
7
compensation expense for stock-based compensation plans of $0.6 million, of which $0.3 million
was a component of general and administrative expenses and $0.3 million was a component of
research and development expenses.
The compensation cost recognized in the Statement of Operations for the nine months ended
September 30, 2008, for our stock-based compensation plans was $1.9 million, of which $1.1
million was a component of general and administrative expenses and $0.8 million was a
component of research and development expenses. For the nine months ended September 30, 2007,
we recognized compensation cost for stock-based compensation plans of $2.3 million, of which
$0.9 million was a component of general and administrative expenses and $1.4 million was a
component of research and development expenses.
The weighted-average fair value of the stock option awards granted during each of the
nine-month periods ended September 30, 2008 and 2007, was $0.44 per share and $2.24 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.
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Expected life
|
|
5.00 to 10.00 years
|
|
5.56 to 10.00 years
|
Expected 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%
|
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 nine
month period ended September 30, 2008 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Per Share
|
|
Exercise Price
|
|
Outstanding at December
31, 2007
|
|
|
6,327,624
|
|
|
$0.30 - $9.82
|
|
$
|
3.16
|
|
Granted
|
|
|
2,284,530
|
|
|
$0.36 - $0.74
|
|
$
|
0.58
|
|
Exercised
|
|
|
(166
|
)
|
|
$0.54
|
|
$
|
0.54
|
|
Cancelled / Forfeited
|
|
|
(680,640
|
)
|
|
$0.30 - $9.82
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008
|
|
|
7,931,348
|
|
|
$0.36 - $9.82
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, there was $3.6 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 2.29 years. The total grant-date fair value of stock
options vested during the three and nine month periods ended September 30, 2008, were $0.5
million and $2.1 million, respectively.
On June 13, 2008, our stockholders approved an amendment to the ESPP to increase the number of
shares reserved for issuance under the ESPP by 200,000, and upon approval by our stockholders
on that date, the amendment to the ESPP became 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
8
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-employees performance is complete. We recognize stock-based compensation
expense for the fair value of the awards in our 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 nine months ended September 30, 2008, we
issued stock options to purchase 130,000 shares of common stock to non-employees.
Basic 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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Stock options
|
|
|
7,931,348
|
|
|
|
6,731,805
|
|
Warrants
|
|
|
6,637,156
|
|
|
|
6,744,769
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,568,504
|
|
|
|
13,476,574
|
|
|
|
|
|
|
|
|
(4)
|
|
Marketable Securities
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
Mortgage-backed and asset-backed securities
due over 90 days
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
Comprehensive Income/Loss
|
Comprehensive
loss, which is presented in
Stockholders (Deficit) 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 Stockholders (Deficit) Equity on our balance sheets.
For the three months ended September 30, 2008, both net loss and comprehensive loss were $8.9
million, as there was no unrealized gain or loss on the sale of marketable securities for that
period. For the three months ended September 30, 2007, both net loss and comprehensive loss was
$6.2 million, as there was no unrealized gain or loss on the sale of marketable securities. For
the nine months ended September 30, 2008, both net loss and comprehensive loss were $34.8
million, as there was no unrealized gain or loss on the sale of marketable securities for that
period. For the nine months ended September 30, 2007, comprehensive loss was $25.7 million,
which included an immaterial unrealized gain on the sale of marketable securities.
(6)
|
|
License Agreements and Collaborations
|
Hoffmann-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
9
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-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 the date of
the July 2008 Roche Amendment (as defined below), we have estimated the relevant period of our
continuing performance obligations as ending in the third quarter of 2009. Accordingly, during
the three month periods ended September 30, 2008 and 2007, we recognized revenue of $0.9 million
and $0.3 million, respectively, under the Amended and Restated 2002 Roche PDE4 Inhibitor
Agreement. During the nine month periods ended September 30, 2008 and 2007, we recognized
revenue of $1.4 million and $0.7 million, respectively, 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), which was 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, 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. We have collaborated 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. We were responsible for conducting Phase 1 clinical trials for these
compounds, and Roche was responsible for clinical development from Phase 2a onwards and for
commercialization. In addition, 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 Amended and Restated
2003 Roche Nicotinic Alpha-7 Agonist Agreement, resulting in a $6.0 million milestone payment to
us in the second quarter of 2008.
Under the terms of the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement, 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.
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 $17.0
million milestone payment by Roche related to the completion of the R3487/MEM 3454 Phase 2a CIAS
clinical trial.
10
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 in full by Roche under the
Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement.
In July 2008, we amended the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement
to provide that Roche will assume responsibility for future Phase 1 development, and related
regulatory filings and manufacturing, for any future nicotinic alpha-7 receptor agonists
developed thereunder, and that Roche will no longer be obligated to make payments to us relating
to early stage clinical development events for such compounds (the July 2008 Roche Amendment).
In September 2008, we further amended the Amended and Restated 2003 Roche Nicotinic Alpha-7
Agonist Agreement to expand the R3487/MEM 3454 Phase 2a CIAS clinical trial to allow for an
increase in the target number of patients enrolled in the trial to up to approximately 212
patients. Under the terms of this amendment, all costs related to the expansion of the study
will be funded by Roche, and in October 2008, Roche paid us $3.1 million, in advance, to cover
such costs. At the conclusion of the study, the actual costs related to the study expansion
will be assessed. In the event that the actual costs of the study expansion are less than $3.1
million, we are obligated to refund to Roche the excess amount advanced to us, and if the actual
costs exceed $3.1 million, Roche is obligated to reimburse us for such excess. In addition to
funding the study expansion costs, Roche has agreed to accelerate a portion of the $17.0 million
payment associated with the completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial as
follows: $3.5 million was paid in October 2008 in connection with entering into the amendment
and $5.0 million is to be paid upon the completion of planned enrollment for the R3487/MEM 3454
Phase 2a CIAS clinical trial. The remaining $8.5 million will become due 30 days following the
availability of top-line data from the R3487/MEM 3454 Phase 2a CIAS clinical trial, which we
expect to report in the second quarter of 2009.
Through September 30, 2008, Roche has paid us a total of $43.0 million in connection with this
collaboration, comprised of an upfront license fee of $10.0 million, research and development
funding of $11.0 million, milestone payments of $12.0 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. As a result of the July 2008 Roche Amendment, our only continuing
substantive performance obligations are to complete: (i) the Phase 1 clinical trial of R4996/MEM
63098, (ii) the Phase 2a clinical trial of R3487/MEM 3454 in cognitive impairment associated
with schizophrenia, (iii) the P50 biomarker study for R3487/MEM 3454, (iv) certain formulation
and manufacturing activities, and (v) certain on-going toxicity studies. It is expected that
all of the activities associated with these obligations will be complete by the end of the third
quarter of 2009. As a result, we now expect to recognize the remaining deferred revenue under
the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement and the remaining
deferred revenue from the 2002 Roche PDE4 Inhibitor Agreement over the estimated period of our
continuing substantive performance obligations with respect to 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 the date of the July
2008 Roche Amendment, we have estimated the relevant period of our continuing substantive
performance obligations as ending in the third quarter of 2009. As of June 30, 2008, the
estimate of the end of the relevant period of our continuing performance obligations under this
agreement had been the fourth quarter of 2013.
Accordingly, during the three month periods ended September 30, 2008 and 2007, we recognized
revenue of $3.4 million and $0.4 million, respectively, under the Amended and Restated 2003
Roche Nicotinic Alpha-7 Agonist Agreement. During the nine month periods ended September 30,
2008 and 2007, we recognized revenue of $4.6 million and $1.2 million, respectively, under the
Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement.
11
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 $7.2 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 to
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 and
nine month periods ended September 30, 2007, we recognized revenue of $2.1 million and $6.3
million, respectively, under the 2005 Amgen PDE10 Inhibitor Agreement. We did not recognize any
revenue under the 2005 Amgen PDE10 Inhibitor Agreement for the three and nine month periods
ended September 30, 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 September 30, 2007, all of our
obligations and all of SMRIs predefined milestone payment obligations under the SMRI
Development Agreement were satisfied. Accordingly, for the three and nine month periods ended
September 30, 2007, we recognized the aggregate milestone payments received from SMRI of $2.2
million as revenue. During the three and nine month periods ended September 30, 2008, we did
not recognize any revenue under the SMRI Development Agreement.
(7)
|
|
2005 Private Placement
|
On 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.
12
(8)
|
|
2006 Private Placement
|
On 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 as of September
30, 2008.
(9)
|
|
2007 Private Placement
|
On 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 a 17% premium to the market price of
our common stock for the ten trading days ending on the trading day immediately preceding the
effective date of the Stock Purchase Agreement. The second tranche of the 2007 Private
Placement closed on June 23, 2008, and we sold an aggregate of 4,694,836 shares of our common
stock at a price of $0.43 per share, and the third tranche closed on August 25, 2008, and we
sold an aggregate of 4,739,336 shares of our common stock at a price of $0.42 per share, in each
case, the shares were sold at a 17% premium to the market price of our common stock for the ten
trading days ending on the trading day immediately preceding our achievement of a predefined
milestone under the terms of the Stock Purchase Agreement.
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
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
13
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 as of September 30, 2008.
In 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 to 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 to us the remaining $4.0 million available under the Hercules Loan
Agreement (the Third Advance). As of September 30, 2008, there was $13.2 million of principal
outstanding under the Hercules Loan Agreement.
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%. We made interest-only payments on a monthly basis through May
2008, and in June 2008, began repaying the Hercules Loan, which is required to be repaid in 30
equal monthly installments of principal and interest. 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 1.5% of the principal prepaid if paid 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 in prior periods we have assessed as low and currently assess
as reasonably possible. 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 (expense) income. 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 twelve-month period ending September 30, 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 September 30, 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
using the effective interest method. In connection with the 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 using the effective interest method.
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
14
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 as of September 30,
2008.
In March 2008, we
reduced our overall headcount in order to shift our resources toward
development activities. In September 2008, we implemented a second reduction in our workforce in
order to further reduce our costs. As part of the September reduction in force, our workforce
will be reduced across all areas of the business. We incurred restructuring costs in connection
with both workforce reductions. We accounted for these restructuring costs pursuant to SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146).
September 2008 Activities
For the three months ended September 30, 2008, we recorded an aggregate charge of $1.5 million
for employee severance, stay-on bonuses, and outplacement costs, of which $1.4 million has been
included in research and development costs. The restructuring costs are being paid during the
period of September 2008 through September 2009. Therefore, an accrued liability of $1.5
million was recognized on our balance sheet as of September 30, 2008. The following table
summarizes the restructuring accrual for the September 2008 workforce reduction, as of the nine
months ended September 30, 2008.
The total restructuring costs related to the stay-on bonuses is $0.4 million. This is being
accrued over the service period earned. As of September 30, 2008, $45,000 of the stay-on bonus
was included in the restructuring accrual.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Charges
|
|
|
Payments
|
|
|
Estimates
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
$
|
|
|
|
$
|
1,372
|
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
$
|
1,346
|
|
Other restructuring costs
|
|
|
|
|
|
|
113
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
|
|
|
$
|
1,485
|
|
|
$
|
(32
|
)
|
|
$
|
|
|
|
$
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2008 Activities
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 charge was reduced in September 2008 by $12,500 to reflect the cost
of outplacement services not utilized by employees. The restructuring costs were paid during the
period of March through September 2008. The following table summarizes the restructuring
accrual, for the March 2008 workforce reduction as of the nine months ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Charges
|
|
|
Payments
|
|
|
Estimates
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
$
|
|
|
|
$
|
327
|
|
|
$
|
(327
|
)
|
|
$
|
|
|
|
$
|
|
|
Other restructuring costs
|
|
|
|
|
|
|
31
|
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
|
|
|
$
|
358
|
|
|
$
|
(345
|
)
|
|
$
|
(13
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Combined 2008 Activities
For the three months ended September 30, 2008, we recorded an aggregate charge of $1.5 million
as described in the September 2008 Activities above. For the nine months ended September 30,
2008, we recorded an aggregate charge of $1.8 million, which is a combination of the March and
September 2008 Activities as described above.
Payments related to this restructuring were $0.1 million and $0.4 million for the three and nine
month periods ended September 30, 2008, respectively.
The following table summarizes the restructuring accrual for the combined 2008 workforce
reductions as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Charges
|
|
|
Payments
|
|
|
Estimates
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
$
|
|
|
|
$
|
1,699
|
|
|
$
|
(353
|
)
|
|
$
|
|
|
|
$
|
1,346
|
|
Other restructuring costs
|
|
|
|
|
|
|
144
|
|
|
|
(24
|
)
|
|
|
(13
|
)
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
|
|
|
$
|
1,843
|
|
|
$
|
(377
|
)
|
|
$
|
(13
|
)
|
|
$
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
|
Fair Value Measurement
|
Effective 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 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.
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 September 30, 2008 are
classified in the table below in one of the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
10,763
|
|
|
$
|
10,763
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,763
|
|
|
$
|
10,763
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put option
|
|
$
|
192
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
192
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
192
|
|
16
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
|
|
(Level 3) (in thousands)
|
|
|
|
|
Derivatives
|
|
Beginning balance at December 31, 2007
|
|
$
|
56
|
|
Unrealized losses included in operations
|
|
|
136
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
The 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
|
|
|
|
|
|
In April 2008, we entered into a sublease agreement with Psychogenics Inc. Psychogenics is
required to pay us a monthly rental fee for the next four years which totals $2.3 million, with
a right to extend the sublease agreement for an additional two years thereafter. Amounts
received under this agreement are reflected as an offset to operating expenses in our Statement
of Operations. During the three and nine month periods ended September 30, 2008, we received
$0.1 million and $0.2 million, respectively, under this sublease agreement.
(14)
|
|
Commitments and Contingencies
|
Employment Arrangements
On September 30, 2008, we entered into an employment agreement which provides for certain severance arrangement
and change of control benefits, including acceleration of the vesting of stock options.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements Discussion and Analysis of Financial Condition and Results of Operations is
intended to provide information to help you better understand and evaluate our financial condition
and results of operations. We recommend that you read this section in conjunction with our
financial statements and notes to financial statements in Item 1 and with our Annual Report on Form
10-K for the year ended December 31, 2007.
Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
These statements are based on our current expectations, assumptions, estimates and projections
about our business and our industry, and involve known and unknown risks, uncertainties, and other
factors that may cause our or our industrys results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied in, or contemplated by, the forward-looking statements. We
generally identify these statements by words or phrases such as believe, anticipate, expect,
intend, plan, will, may, should, estimate, predict, potential, continue, or the
negative of such terms or other similar expressions. Our actual results and the timing of events
may differ significantly from the results discussed in the forward-looking statements, and you
should not place undue reliance on these statements. Factors that might cause such a difference
include those discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2007, and below in Part II, Item 1A. We disclaim any intent or
obligation to update any forward-looking statements as a result of developments occurring after the
period covered by this report or otherwise.
OVERVIEW
Since our incorporation in March 1997, we have devoted substantially all of our resources to
the discovery and development of innovative drug candidates for the treatment of a broad range of
central nervous system (CNS) conditions, many of which exhibit significant impairment of memory and
other cognitive functions. These conditions include neurological diseases associated with aging,
such as Alzheimers disease, and also include certain psychiatric disorders such as schizophrenia.
17
Our drug development pipeline currently includes five programs, nicotinic alpha-7 agonists, PDE4
inhibitors, PDE10 inhibitors, 5-HT
6
antagonists and an L-type calcium channel modulator.
We seek to leverage our pipeline of early development candidates through collaborations with
leading pharmaceutical and biotechnology companies. We have a collaboration with Roche for the
development of nicotinic alpha-7 agonists and a collaboration with Amgen for the development of
PDE10 inhibitors. We are currently actively developing compounds from both the PDE4 inhibitor
program and the 5-HT
6
program and funding that development on our own.
Nicotinic Alpha-7 Agonist Program
Our nicotinic alpha-7 receptor program is being conducted pursuant to a collaboration with
Roche, which we entered into in August 2003 (the 2003 Roche Nicotinic Alpha-7 Agonist
Agreement), 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. We have collaborated with
Roche in conducting certain early stage research and development activities with respect to
these compounds, and we were responsible for conducting Phase 1 clinical trials for such
compounds. Roche was responsible for clinical development from Phase 2a onwards and for
commercialization of such compounds. In addition, Roche retained the option granted under the
2003 Roche Nicotinic Alpha-7 Agonist Agreement to secure a license to R3487/MEM 3454 upon
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, resulting in a
$6.0 million milestone payment to us in the second quarter of 2008.
Under the terms of the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist Agreement,
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
Alzheimers disease and cognitive impairment associated with schizophrenia (CIAS). 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 Alzheimers 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. In September 2008, we further amended the Amended and Restated 2003 Roche
Nicotinic Alpha-7 Agonist Agreement to expand the R3487/MEM 3454 Phase 2a CIAS clinical trial
to allow for an increase in the target number of patients enrolled in the trial to up to
approximately 212 patients (the September 2008 Roche Amendment). Under the terms of this
amendment, all costs related to the expansion of the study will be funded by Roche, and in
October 2008, Roche paid us $3.1 million, in advance, to cover such costs. At the conclusion
of the study, the actual costs related to the study expansion will be assessed. In the event
that the actual costs of the study expansion are less than $3.1 million, we are obligated to
refund to Roche the excess amount advanced to us, and if the actual costs exceed $3.1
million, Roche is obligated to reimburse us for such excess. In addition to funding the
study expansion costs, Roche has agreed to accelerate a portion of the $17.0 million payment
associated with the completion of the R3487/MEM 3454 Phase 2a CIAS clinical trial as follows:
$3.5 million was paid in October 2008 in connection with entering into the amendment and
$5.0 million is to be paid upon the completion of planned enrollment for the R3487/MEM 3454
Phase 2a CIAS clinical trial. The remaining $8.5 million will become due 30
days following the availability of top-line data from the R3487/MEM 3454 Phase 2a CIAS
clinical trial, which we expect to report in the second quarter of 2009.
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
sold 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
18
Private Placement closed in June 2007, the second tranche closed in June 2008 and the third
tranche closed in August 2008.
In February 2008, we announced plans to conduct a biomarker study of R3487/MEM 3454 in
patients with schizophrenia. The primary objective of the trial is to study P50 and P300
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. We expect to initiate the biomarker trial in the fourth quarter of 2008 and
complete that trial in the third quarter of 2009.
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 Phase 1 program and
expect to announce results from the program during the fourth quarter of 2008.
In July 2008, we amended the Amended and Restated 2003 Roche Nicotinic Alpha-7 Agonist
Agreement to provide that Roche will assume responsibility for future Phase 1 development,
and related regulatory filings and manufacturing, for any future nicotinic alpha-7 receptor
agonists developed thereunder, and Roche will no longer be obligated to make payments to us
relating to early stage clinical development events for such compounds (the July 2008 Roche
Amendment). The July 2008 Roche Amendment enables us to accelerate the recognition of
revenue for payments we have received under the Amended and Restated 2003 Roche Nicotinic
Alpha-7 Agonist Agreement and under the 2002 Roche PDE4 Inhibitor Agreement.
Through September 30, 2008, Roche has paid us a total of $43.0 million under this
collaboration, comprised of an upfront license fee of $10.0 million, research and development
funding of $11.0 million, milestone payments of $12.0 million and an equity investment of
$10.0 million.
PDE4 Inhibitor Program
In July 2002, we entered into a collaboration with Roche for the development of PDE4
inhibitors. During the course of this collaboration, we named two drug candidates, MEM 1414,
which has completed Phase 1 clinical trials, and MEM 1917. In June 2007, we restructured the
2002 Roche PDE4 Inhibitor Agreement to reacquire from Roche all rights to the PDE4 inhibitor
program. We continue to evaluate alternatives for the further development of our PDE4
inhibitor program, which could include taking the program forward, in whole or in part, on
our own or with a new collaboration partner. In addition, we are planning to progress MEM
1414 into a Phase 2a trial in asthma by the end of 2008 and expect to report top-line results
from that trial in the second half of 2009. Through June 2007, when 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 certain circumstances, we are obligated to make milestone
payments to Roche in the future.
PDE10 Inhibitor Program
In October 2005, we entered into a collaboration with Amgen for the development of PDE10
inhibitors for neurological and psychiatric disorders, pursuant to which we conducted a
two-year collaborative preclinical research program relating to PDE10 inhibitors in
accordance with a predefined research work plan. Under the terms of the 2005 Amgen PDE10
Inhibitor Agreement, Amgen is obligated to make milestone payments to us upon the achievement
of pre-specified research, development, regulatory approval and sales milestones relating to
PDE10 inhibitors. Amgen has paid us a total of $14.2 million through September 30, 2008
comprised of a $5.0 million upfront fee, $7.2 million in research and development funding and
a $2.0 million milestone payment. 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.
19
5-HT
6
Antagonist Program
We have internally developed a portfolio of novel, potent and selective 5-HT
6
antagonists, which includes compounds that are covered by intellectual property that we
licensed from NPS Allelix Corp., or NPS, in October 2003, under a license agreement which we
amended and restated in April 2007. We refer to this as our Amended and Restated 2003 NPS
5-HT
6
Antagonist Agreement. Under the terms of the Amended and Restated 2003 NPS
5-HT
6
Antagonist Agreement, we have an exclusive, sub-licensable license under
certain NPS patents and know-how to 5-HT
6
antagonists for the treatment of
diseases, in all indications, for either human or veterinary use. We are required to make
payments to NPS upon our achievement of specified development and regulatory milestones. We
also are obligated to pay royalties to NPS during the term of the agreement based on a
specified percentage of worldwide net sales of products that include 5-HT
6
antagonist compounds covered by the Amended and Restated 2003 NPS 5-HT
6
Antagonist
Agreement. While we are prepared to commence a Phase 1 program for MEM 68626, at this time,
we have determined to postpone the commencement of that trial.
L-Type Calcium Channel Modulator
MEM 1003 is a neuronal L-type calcium channel modulator under development for the treatment
of Alzheimers disease. In October 2007, we reported top-line results from a Phase 2a study
that evaluated the safety and efficacy of MEM 1003 in patients with mild to moderate
Alzheimers disease. The trial failed to meet its primary endpoint, which was the
twelve-week mean change in the Alzheimers disease Assessment Scale-Cognitive subscale
(ADAS-cog) score in the overall population. Based on these results, we have determined
that any further development of MEM 1003 would require our securing a collaboration partner
for this program.
In March 2007, we announced that we had completed a Phase 2a trial of MEM 1003 in bipolar
mania and that MEM 1003 did not prove effective in that trial. We have completed a full
analysis of the data from that trial and do not, at this time, have plans to proceed with
further clinical trials of MEM 1003 in bipolar disorder. We conducted the MEM 1003 Phase 2a
bipolar disorder clinical trial with funding support from SMRI in the aggregate amount of
$3.2 million. Under the agreement with SMRI, 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 from SMRI in the form
of milestone payments.
We have an exclusive worldwide, sub-licensable license to MEM 1003 from Bayer AG, or Bayer,
for the treatment of human peripheral and CNS-related disorders. As of September 30, 2008,
we had paid $2.0 million in upfront and milestone payments to Bayer under this agreement. We
are required to make additional payments to Bayer of up to $18.0 million in the event that we
achieve specified milestones and to pay royalties on sales of any products incorporating MEM
1003.
Since our inception, we have incurred substantial losses, and as of September 30, 2008, we had an
accumulated deficit of $251.4 million, of which $19.5 million related to preferred stock dividends
that were forfeited upon the conversion of our redeemable convertible preferred stock upon the
closing of our initial public offering on April 8, 2004. These losses and accumulated deficit have
resulted from the significant costs incurred in the research and development of our compounds and
technologies, including payroll and payroll-related costs, manufacturing costs of preclinical and
clinical grade materials, facility and facility-related costs, preclinical study costs, clinical
trial costs, and general and administrative costs. We are funding or contemplating funding the
development of several of our drug candidates and programs. Our most significant commitment
currently is to R3487/MEM 3454, for which we are funding the R3487/MEM 3454 Phase 2a CIAS clinical
trial, which began in December 2007.
We believe that our existing cash and cash equivalents, 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 Technology Growth Capital, Inc.
(Hercules) and capital equipment requirements into the first half of 2009.
We have financed our operations since inception through the sale of equity securities, payments
received under our collaboration and development agreements, equipment financings, interest income
and debt financing.
Since our inception, we have raised gross proceeds totaling $194.8 million through the sale of our
equity securities. In September 2005, we raised gross proceeds of $31.0 million in a private
placement, issuing 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 at an exercise price of $2.22 per
share.
20
We refer to this as our 2005 Private Placement. In October and December 2006, we closed a
two-tranche private placement, raising gross proceeds of $32.2 million and issuing an aggregate of
28,232,202 shares of our common stock at a purchase price of $1.11 per share and warrants to
purchase 7,058,042 shares of our common stock at an exercise price of $1.33 per share. We refer to
this as our 2006 Private Placement. In February 2007, we exercised our right to require the
exercise of the October 2006 warrants pursuant to their terms, resulting in gross proceeds to us of
$5.0 million and the issuance of an aggregate of 5,402,593 additional shares of common stock. In
connection with the 2007 Private Placement, we have raised gross proceeds to date of $6.0 million,
issuing an aggregate of 694,444 shares of common stock at a price of $2.88 per share in the first
tranche, an aggregate of 4,694,836 shares of our common stock at a price of $0.43 per share in the
second tranche and an aggregate of 4,739,336 shares of our common stock at a price of $0.42 per
share in the third tranche.
In March 2007, we entered into a $10.0 million term loan agreement with Hercules (the Hercules
Loan Agreement), which was amended in June 2007 to increase the maximum loan amount to $15.0
million. As of September 30, 2008, there was $13.2 million of principal outstanding under the
Hercules Loan Agreement. We made interest-only payments on the Hercules on a monthly basis through
May 2008, and in June 2008 began making principal payments on the Hercules Loan, which is required
to be repaid in 30 equal monthly installments of principal and interest. In connection with the
Hercules Loan Agreement and the Hercules Amendment, we issued to Hercules warrants to purchase
598,086 and 325,521 shares of our common stock at exercise prices of $2.09 and $1.92 per share,
respectively.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition, accrued expenses, research and development, the
fair value of our equity securities, the valuation of the Hercules put option, and the likelihood
that an event or circumstance that constitutes a material adverse effect under the terms of the
Hercules Loan Agreement will occur. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect the judgments and estimates used in
the preparation of our financial statements.
Use of estimates
The preparation of the financial statements requires us to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the period. Significant items subject to such estimates and assumptions
include the fair value of our equity securities, carrying amount of property, plant and equipment,
valuation allowances for deferred income tax assets, the estimated development period of compounds
under our collaborations for revenue recognition purposes and estimated liabilities for services
provided in connection with our clinical programs. Actual results could differ from those
estimated.
Revenue recognition
We recognize revenue from our research collaborations in accordance with the SECs Staff Accounting
Bulletin (SAB) No. 104,
Revenue Recognition,
and other such pronouncements as are applicable, and
with EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables
(EITF No.
00-21)
,
which is applicable and effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003.
Revenue arrangements with multiple deliverables are reviewed in order to determine whether the
multiple elements can be divided into separate units of accounting. If separable, the consideration
received is allocated among the separate units of accounting based on their respective fair values,
and the applicable revenue recognition criteria are applied to each of the separate units.
Otherwise, the applicable revenue recognition criteria are applied to combined elements as a single
unit of accounting. Revenues under such collaborations include the receipt of non-refundable
license fees, milestone payments and research and development funding. Revenues from research
collaboration agreements considered as separate units are recognized as and when the contracted
services are performed or when milestones are achieved, in accordance with the terms of the
specific agreements and when collection is
21
reasonably assured. Combined elements including upfront payments for the use of technology, where
further services are to be provided or fees received on the signing of research agreements, are
recognized over the period of performance of the related activities. Amounts received in advance of
recognition of revenue are reported as unearned, or deferred, revenues, as are amounts which are
refundable if underlying conditions are not met.
We have determined that each of our collaboration agreements with multiple deliverables will be
accounted for under a single unit contract model that is based on the terms of the collaborations
and deliverables. Accordingly, upfront license fees, milestone payments and research and
development funding received under our collaboration agreements is deferred and recognized over the
term of our substantive contractual obligations.
Through September 30, 2008, 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
thereunder. Solely for purposes of revenue recognition under the Amended and Restated 2003 Roche
Nicotinic Alpha-7 Agonist Agreement, as of the date of the July 2008 Roche Amendment, we have
estimated the relevant period of our continuing substantive performance obligations as ending in
the third quarter of 2009. As of June 30, 2008, the estimate of the end of the relevant period of
our continuing performance obligations under this agreement had been the fourth quarter of 2013.
We periodically review the estimated development periods and our estimated research efforts under
our collaborations and, to the extent such estimates change, the impact of such change is recorded
prospectively. Payments received from our collaboration partners for research and development
activities performed by us that are deemed to be a separate unit of accounting, as defined by EITF
No. 00-21, are recognized as revenue as research and development services are performed.
Otherwise, the payments are recognized as revenue over the term of the applicable collaboration
agreement or the expected period of our continuing substantive performance obligations under the
agreement.
Accrued expenses
As part of the process of preparing financial statements, we are required to estimate accrued
expenses. This process involves identifying services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for such service where
we have not been invoiced or otherwise notified of the actual cost. This is done as of each balance
sheet date in our financial statements. Examples of estimated accrued expenses include:
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professional service fees, such as attorneys and accountants fees;
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preclinical and clinical contract research organization fees;
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fees to be paid to data management organizations and investigators in conjunction with clinical trials; and
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fees to be paid to contract manufacturers in conjunction with the production of the
supply of our drug candidates for preclinical and clinical trials.
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In connection with the above services, our estimates are most affected by our projections of the
timing of services provided relative to the actual level of services performed by such service
providers. The majority of our service providers invoice us monthly in arrears for services
performed. In the event that we do not identify certain costs that have begun to be incurred or we
under- or over-estimate the level of services performed or the costs of such services, our actual
expenses could materially differ from such estimates. The date on which certain services commence,
the level of services performed on or before a given date, and the cost of such services are often
subjective determinations. We make these judgments based upon the facts and circumstances known to
us in accordance with US GAAP.
Research and development expense
Research and development expense consists primarily of costs associated with our internal research
and development activities, including salaries, and related expenses for personnel, stock-based
compensation, costs of facilities and equipment, fees paid to contract research organizations and
consultants in connection with our preclinical studies and clinical trials, including for services
such as the independent monitoring of our clinical trials and the evaluation of data from our
clinical trials, costs of materials used in research and development, upfront and milestone
payments under our in-licensing agreement, consulting, license and sponsored university-based
research fees paid to third parties, and depreciation of capital assets used to develop our drug
candidates.
22
Stock-based payment arrangements
Effective January 1, 2006, we began recording compensation expense associated with stock options
and other forms of equity compensation in accordance with SFAS No. 123R. Prior to January 1, 2006,
we accounted for stock options according to the provisions of Accounting Principles Board (APB)
Opinion 25,
Accounting for Stock Issued to Employees
, and related interpretations, and therefore,
no related compensation expense was recorded for awards granted to employees and members of our
Board of Directors with no intrinsic value. We adopted the modified prospective transition method
provided for under SFAS No. 123R, and consequently, we have not retroactively adjusted results from
prior periods. Under this transition method, compensation cost associated with stock options
recognized includes: (i) 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 SFAS No. 123; and (ii) 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 No. 123R.
We apply the provisions of 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-employees performance is complete. We recognize
stock-based compensation expense for the fair value of the awards in our 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 nine months ended
September 30, 2008, we issued stock options to purchase 130,000 shares of common stock to
non-employees.
For the three months ended September 30, 2008, we recognized compensation cost for stock-based
compensation plans of $0.5 million, of which $0.3 million was a component of general and
administrative expenses and $0.2 million was a component of research and development expenses. For
the nine months ended September 30, 2008, we recognized compensation cost for stock-based
compensation plans of $1.9 million of which $1.1 million was a component of general and
administrative expenses and $0.8 million was a component of research and development expenses.
We continue to estimate the fair value of each stock option award on the date of grant using the
Black-Scholes option valuation model based on assumptions for expected stock price volatility,
expected term of the option and risk-free interest rate at the date of grant.
Valuation of Hercules put option
The Hercules Loan Agreement includes a provision whereby Hercules may require that all amounts
outstanding under the Hercules Loan 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. Valuation of this derivative is based on an
Option Price Model adjusted for the estimated probability of a change in control of the Company.
The Option Price Model uses estimates and assumptions based on historical and projected data. One
of the key assumptions impacting the value of this derivative security is the estimate of the
likelihood of a change in control, which in prior periods we have assessed as low and currently
assess as reasonably possible. Changes to future estimates of the likelihood of a change in control
may have a material impact on the valuation of the derivative. Any change in the value of the
derivative over the life of the loan is being recognized as other
(expense) income.
Classification of Hercules debt
The Hercules Loan Agreement includes as one of the events of default a material adverse effect
clause whereby Hercules may accelerate payments of amounts outstanding thereunder if 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 agreement, and such event or circumstance is not cured. As of September
30, 2008, there was $13.2 million of principal outstanding under the Hercules Loan Agreement. We
have classified the debt from Hercules based on the scheduled maturities based on our assessment
that it is not likely that the material adverse effect clause will be invoked during the
twelve-month period ending September 30, 2009. If, in the future, we estimate that it is likely
that the material adverse effect clause will be invoked, all amounts outstanding under our Hercules
Loan Agreement at that time would be classified as current.
23
Registration payment arrangements
To date, we have entered into one debt and several equity financing transactions. In connection
with our issuance of equity securities of the Company, we have granted certain stockholders
registration rights. In most cases, these registration rights agreements impose a penalty on us if
we fail to meet our obligations under those agreements.
We account for registration rights arrangements and the related penalty provisions under FSP EITF
00-19-2,
Accounting for Registration Payment Arrangements
(EITF 00-19-2), which addresses an
issuers accounting for registration payment arrangements. EITF 00-19-2 requires the contingent
obligation to make future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, to be separately recognized and measured in accordance with FASB No.
5,
Accounting for Contingencies,
and Financial Accounting
Standards Board (FASB) Interpretation No. 14,
Reasonable Estimation of the
Amount of a Loss
.
We are currently maintaining effective registration statements with regard to the securities
covered by registration rights agreements, and we do not deem it probable that we will incur a
liability as a result of non-compliance with these agreements. As a result, for the nine months
ended September 30, 2008, we have not recognized any contingent liabilities relating to our
registration rights agreements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2007,
the FASB ratified EITF Issue No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
(EITF No. 07-3). EITF No. 07-3 requires that nonrefundable
advance payments for goods and services that will be used or rendered in future research and
development activities pursuant to executory contractual arrangements be deferred and recognized as
an expense in the period that the related goods are delivered or services are performed. We adopted
EITF No. 07-3 as of January 1, 2008, and the adoption did not have a material impact on our results
of operations or financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 applies only to fair value measurements that are already required or
permitted by other accounting standards. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 for financial assets and liabilities and for fiscal years beginning after
November 15, 2008 for non-financial assets and liabilities. We adopted SFAS No. 157 as of January
1, 2008, for financial assets and liabilities, and the adoption did not have a material impact on
our results of operations or financial position. We have not yet determined the effect, if any, the
adoption of SFAS No. 157 for non-financial assets and liabilities may have on our financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS No. 159), which permits entities to choose to measure financial assets
and liabilities, with certain exceptions, at fair value at specified election dates. A business
entity reports unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. This statement is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007. We adopted SFAS
No. 159 as of January 1, 2008, for financial assets and liabilities but did not designate any
assets or liabilities to be measured at fair value for purposes of applying SFAS No. 159.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(SFAS No. 161), which requires enhanced disclosures about derivative instruments and
hedging activities to enable investors to better understand a companys use of derivative
instruments and their effect on a companys financial position, financial performance, and cash
flows. SFAS No. 161 is effective for us beginning on January 1, 2009.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007
Revenue
We do not currently have any commercial products for sale and do not anticipate having any
commercial products for sale within the foreseeable future. To date, our revenue has been derived
from our collaborations with Roche and Amgen and from our development agreement with SMRI. Any
additional revenue that we may receive in the future is expected to consist primarily of upfront
license fees, milestone payments, research and development funding and royalty payments from either
Roche or Amgen, or any future collaboration partners.
24
Revenue decreased by $0.7 million, or 14%, to $4.3 million for the three months ended September 30,
2008, from $5.0 million for the three months ended September 30, 2007. The $0.7 million decrease
primarily reflects the fact that we recognized revenue of $2.1 from Amgen in connection with the
PDE10 inhibitor program and $2.2 million from SMRI in connection with the Phase 2a bipolar disorder
clinical trial of MEM 1003 during the 2007 period, but not in the 2008 period. This decrease was
partially offset by $3.7 million in additional revenue recognized in 2008, which related to
milestone payments and research and development funding received from Roche and the accelerated
deferred revenue recognition in connection with the change in the estimated period of our
continuing performance obligations for the nicotinic alpha-7 agonist program that resulted from the
July 2008 Amendment.
Research and development expense
Research and development expense increased by $1.3 million, or 14%, to $10.3 million for the three
months ended September 30, 2008, from $9.0 million for the three months ended September 30, 2007.
The $1.3 million increase was due primarily to a $1.4 million increase in costs related to our
September 2008 restructuring, a $1.0 million increase in costs associated with the nicotinic
alpha-7 program, $0.6 million in increased costs associated with the 5-HT
6
antagonist
program, and $0.6 million in increased costs associated with the PDE4 inhibitor program, offset
by $1.1 million in decreased costs associated with the MEM 1003 program, a $0.8 million decrease in
other personnel-related costs and a $0.3 million decrease in
administrative costs.
General and administrative expense
General and administrative expense was $2.3 million for both of the three month periods ended
September 30, 2008 and 2007.
Interest income and interest expense
Interest income decreased by $0.5 million, or 83%, to $0.1 million for the three months ended
September 30, 2008, from $0.6 million for the three months ended September 30, 2007. Interest
expense was $0.6 million for both of the three month periods ended September 30, 2008 and 2007.
The $0.5 million decrease in interest income was attributable to lower average investment balances
and interest rates during the 2008 period.
Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007
Revenue
We do not currently have any commercial products for sale and do not anticipate having any
commercial products for sale within the foreseeable future. To date, our revenue has been derived
from our collaborations with Roche and Amgen and from our development agreement with SMRI. Any
additional revenue that we may receive in the future is expected to consist primarily of upfront
license fees, milestone payments, research and development funding and royalty payments from either
Roche or Amgen, or any future collaboration partners.
Revenue decreased by $4.4 million, or 42%, to $6.0 million for the nine months ended September 30,
2008, from $10.4 million for the nine months ended September 30, 2007. The $4.4 million decrease
primarily reflects the fact that we recognized revenue of $6.3 million from Amgen in connection
with the PDE10 inhibitor program and $2.2 million from SMRI in connection with the Phase 2a bipolar
disorder clinical trial of MEM 1003 during the 2007 period, but not in the 2008 period. This
decrease was partially offset by $4.1 million in additional revenue recognized in 2008, which
related to milestone payments and research and development funding received from Roche and the
accelerated deferred revenue recognition in connection with the change in the estimated period of
our continuing performance in connection with the nicotinic alpha-7 agonist program that resulted
from the July 2008 amendment.
Research and development expense
Research and development expense increased by $1.5 million, or 5%, to $31.6 million for the nine
months ended September 30, 2008, from $30.1 million for the nine months ended September 30, 2007.
The $1.5 million increase was due primarily to $3.6 million in increased costs associated with the
nicotinic alpha-7 agonist program, $2.2 million in increased costs associated with the 5-HT
6
antagonist program, a $1.7 million increase in costs primarily related to our March and
September 2008 restructurings and $1.3 million in increased costs associated with the PDE4
inhibitor program, offset by $5.1 million in decreased costs associated with the MEM 1003 program,
a $1.5 million decrease in stock-based compensation and other personnel-related costs, and a $0.7
million decrease in administrative costs.
25
General and administrative expense
General and administrative expense increased by $0.6 million, or 8%, to $7.7 million for the nine
months ended September 30, 2008, from $7.1 million for the nine months ended September 30, 2007.
The $0.6 million increase was due primarily to an increase of $0.6 million in legal and patent
fees.
Interest income and interest expense
Interest income decreased $1.3 million, or 68%, to $0.6 million for the nine months ended September
30, 2008, from $1.9 million for the nine months ended September 30, 2007. Interest expense
increased $1.2 million, or 150%, to $2.0 million for the nine months ended September 30, 2008, from
$0.8 million for the nine months ended September 30, 2007. The $1.3 million decrease in interest
income was attributable to lower average investment balances and interest rates during the 2008
period. The $1.2 million increase in interest expense was related to higher amounts outstanding
under the Hercules Loan Agreement, consummated in March 2007, during the 2008 period.
Liquidity and capital resources
We have financed our operations since inception through the sale of equity securities, payments
received under our collaboration and development agreements, equipment financings, interest income
and through debt financing. From inception through September 30, 2008, we have raised net proceeds
of $194.8 million from the sale of equity securities, excluding purchases made through our ESPP
Plan. In addition, through September 30, 2008, we have received $43.2 million in upfront and
milestone payments, $29.7 million in research and development funding, $10.4 million from equipment
financings, $2.5 million from the reimbursement of external research costs, $9.4 million in
interest income and $15.0 million in debt financing.
At September 30, 2008, cash, cash equivalents and marketable securities were $14.0 million as
compared to $38.2 million at December 31, 2007. Our cash, cash equivalents and marketable
securities are highly liquid investments and consist of term deposits and investments in money
market funds with commercial banks and financial institutions, whose underlying investments are
asset-backed securities, certificate of deposits, commercial paper, corporate notes, funding
agreements, master notes, municipal bonds, repurchase agreements and time deposits, with a
dollar-weighted average maturity less than sixty days. To date, inflation has not had a material
effect on our business.
We expect to incur losses from operations for the foreseeable future. We believe that our existing
cash and cash equivalents, 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 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. However, 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.
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 firms 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.
In March 2007, we entered into a $10.0 million term loan agreement with Hercules. Pursuant to the
Hercules Loan Agreement, Hercules advanced us $6.0 million in March 2007 (the First Advance). In
June 2007, we entered into an amendment with Hercules, increasing the aggregate amount that we may
borrow from Hercules from $10.0 million to $15.0 million (the Hercules Amendment). 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). Under the terms of the agreement we began
making principal payments to Hercules in June 2008. As of September 30, 2008, there was $13.2
million of principal outstanding under the Hercules Loan Agreement.
26
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%. We made interest-only payments on a monthly basis through May 2008, and
in June 2008 began repaying the Hercules Loan, which is required to be repaid in 30 equal monthly
installments of principal and interest. 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 1.5% of the principal prepaid if paid 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. 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 payment of 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 September 30, 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 per share of $1.92 (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 loan includes a deferred interest payment of 3% of the amount borrowed under the Hercules Loan
Agreement, which is payable on the maturity date. We include this amount in deferred financing
costs and amortize it to interest expense over the term of the loan using the effective interest
method. In connection with the 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 using the
effective interest method.
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 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
requirements.
Net cash used in operating activities was $26.2 million for the nine months ended September 30,
2008. This primarily reflects a net loss of $34.8 million and an increase in receivables of
$7.0 million, offset by an increase in deferred revenue of $4.5
million, an increase in accrued expenses and other current liabilities, of $6.4 million in total, a
non-cash stock-based compensation charge of $1.9 million, a non-cash charge for depreciation
expense of $1.2 million, a non-cash charge for amortization of deferred financing costs and
discount on loans of $0.7 million, an increase in accounts payable of $0.5 million, an increase in
other non-current liabilities of $0.1 million and an increase in unrealized gain /loss related to
valuation of put options of $0.1 million. Net cash used by investing activities for the nine
months ended September 30, 2008 was $18,000, representing funds primarily used for capital
expenditures, partially offset by sales of marketable securities. Net cash provided by financing
activities during the nine months ended September 30, 2008 was $2.1 million, due primarily to the
issuance of common stock in connection with the 2007 Private Placement of $4.1 million, offset by a
repayment of long-term-debt under the Hercules Loan Agreement of $1.8 million and equipment notes
of $0.2 million.
We are funding or contemplating funding the development of several of our drug candidates and
programs. Our most significant commitment currently is to R3487/MEM 3454, for which we are funding
a multi-center Phase 2a clinical trial in CIAS. Our
27
contractual obligations may vary depending upon the results of underlying studies, the completion
of preclinical work and/or clinical trials and certain other variables that may yield a result that
differs from the past. To the extent our capital resources are insufficient to meet future capital
requirements, we will need to raise additional capital to fund our operations. However, we cannot
assure you that we will be able to raise additional capital on acceptable terms, or at all. Our
future cash requirements will depend on many factors, including:
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the number of compounds and drug candidates that we advance into or through the development process;
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the funding we receive from our collaborations;
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the scope and results of our and our collaborators clinical trials;
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potential in-licensing or acquisition of other compounds or technologies;
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the costs involved in utilizing third party contract research organizations for preclinical studies and clinical trials;
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the timing of, and the costs involved in, obtaining regulatory approvals;
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the availability of third parties, and the cost, to manufacture our drug candidates
for preclinical and clinical trial supply;
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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
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the cost of commercialization activities, including product marketing, sales and
distribution.
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We have filed a shelf registration statement on Form S-3 with the SEC covering the issuance of up
to $75.0 million of securities including common stock and preferred stock and/or warrants, which
was declared effective on August 7, 2007. No securities have been issued under this registration
statement. We may publicly offer securities from time to time at prices and terms to be determined
at the time of the offering. We cannot assure you that additional equity or debt financing will be
available on acceptable terms, if at all. If adequate funds are not available, we may be required
to delay, reduce the scope of or eliminate our research and development programs, reduce our
commercialization efforts, or obtain funds through arrangements with collaborators or others that
may require us to relinquish rights to certain drug candidates that we might otherwise seek to
develop or commercialize independently. Additionally, any future equity funding may dilute the
ownership of our equity investors.
Item 4T. Controls and Procedures
Evaluation of disclosure controls and procedures
Based on their evaluation as of September 30, 2008, our Principal Executive Officer and Principal
Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective to
ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods specified in the SECs
rules and
Form 10-Q.
Change in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter ended
September 30, 2008 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on the effectiveness of controls
Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance
that the objectives of our disclosure control system are met. Because of inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control
issues, if any, within a company have been detected.
28
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, liquidity
and/or operating results. The risk factor set forth below replaces in its entirety the risk factor
from our Quarterly Report on Form 10-Q for the period June 30, 2008 with the title,
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 SECs 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 SECs penny stock rules and
decrease the liquidity of our common stock.
Effective October 28, 2008, our common stock was transferred from the NASDAQ Global Market to the
NASDAQ Capital Market. In order to maintain our listing on the NASDAQ Capital Market, we must
continue to meet certain financial and corporate governance qualifications. From the date of our
initial public offering through October 28, 2008, our common stock was listed on the NASDAQ Global
Market. On December 5, 2007, we received a Staff Deficiency Letter from the Nasdaq Stock Market
which stated that we were not in compliance with 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, based on our stockholders equity at December 31, 2007, we were also 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). On June 6, 2008, we
received a letter from the Nasdaq Stock Market notifying us that, because we had not regained
compliance with the $1.00 bid price requirement set forth in Marketplace Rule 4450(a)(5), our
securities were subject to delisting from The NASDAQ Global Market, unless we requested a hearing.
We requested a hearing before the Nasdaq Listing Qualifications Panel (the Panel), and on July
31, 2008, we appeared before the Panel and presented our plan to achieve and sustain compliance
with the continued listing requirements of the Nasdaq Stock Market, which included a request to
transfer to the NASDAQ Capital Market. On October 24, 2008, the Panel approved our request to
transfer to the NASDAQ Capital Market, subject to an extension to comply with the continued listing
requirements, and on October 28, 2008, our common stock began trading on the NASDAQ Capital Market.
The Panel has granted us an extension through December 3, 2008 to comply with the NASDAQ Capital
Market $35.0 million market capitalization requirement, or the alternative requirement of $2.5
million in stockholders equity. In addition, the Panel notified us that as a result of the bid
price moratorium announced by the NASDAQ Stock Market on October 16, 2008, in the event we achieve
compliance with the other continued listing requirements of the NASDAQ Capital Market by December
3, 2008, we will have through February 2, 2009 to comply with the $1.00 minimum bid price
requirement of the NASDAQ Capital Market. We cannot assure you that we will be successful in
achieving and sustaining compliance with the continued listing requirements of the Nasdaq Capital
Market in the timeframe defined by the Panel.
If we do not achieve and sustain compliance with the continued listing requirements of the
NASDAQ Capital Market, the Panel will provide us with written notification that our common stock
will be delisted. Following any such delisting, our common stock may be traded over-the-counter
on the OTC Bulletin Board or in the pink sheets. These alternative markets, however, are
generally considered to be less efficient than, and not as broad as, the NASDAQ Capital Market.
Many OTC stocks trade less frequently and in smaller volumes than securities traded on the
Nasdaq markets, which could have a material adverse effect on the liquidity of our common stock.
If our common stock is delisted from the Nasdaq Capital Market, there may be a limited market
for our stock, trading in our stock may become more difficult and our share price could decrease
even further. In addition, if our common stock is delisted, our ability to raise additional
capital may be impaired.
In addition, our common stock may become subject to penny stock rules. The SEC generally
defines penny stock as an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. We are not currently subject to the penny stock rules
because our common stock qualifies for an exception to the SECs penny stock rules for companies
that have an equity security that is quoted on the Nasdaq Stock Market. However, if we were
delisted, our common stock would become subject to the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell our common stock. If our
common stock were considered penny stock, the ability of broker-dealers to sell our common stock
and the ability of our stockholders to sell their shares in the secondary market would be
limited and, as a result, the market liquidity
29
for our common stock would be adversely affected. We cannot assure you that trading in our
securities will not be subject to these or other regulations in the future.
Item 6. Exhibits
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10.1
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Amended and Restated Employment Agreement, dated September 30, 2008,
by and between the Registrant and James R. Sulat.
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10.2
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*
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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.
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10.3
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*
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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.
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31.1
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Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
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31.2
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Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
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32.1
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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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*
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Confidential treatment requested as to certain portions, which portions are omitted and
filed separately with the SEC.
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30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MEMORY PHARMACEUTICALS CORP.
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By:
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/s/ Vaughn M. Kailian
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Vaughn M. Kailian
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President and Chief Executive Officer
(Principal Executive Officer and
Duly Authorized Officer)
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Date: November 13, 2008
31
Exhibit Index
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10.1
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Amended and Restated Employment Agreement, dated September 30, 2008,
by and between the Registrant and James R. Sulat.
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10.2
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*
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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.
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10.3
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*
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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.
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31.1
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Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
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31.2
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Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
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32.1
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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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*
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Confidential treatment requested as to certain portions, which portions are omitted and
filed separately with the SEC.
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32
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