MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Ariston Merger

On March 8, 2010, the Company entered into the Merger Agreement by and among the Company, Ariston and Merger Sub.  Pursuant to the terms and conditions set forth in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston, with Ariston being the surviving corporation of the Merger.  As a result of the Merger, Ariston became a wholly-owned subsidiary of the Company.

Under the terms of the Merger Agreement, the consideration payable by the Company to the stockholders and note holders of Ariston consists of the issuance of 7,062,423 shares of the Company's common stock, par value $0.001 per share, ("Common Stock") at Closing (as defined in the Merger Agreement) plus the right to receive up to an additional 24,718,481 shares of Common Stock (the “Milestone Shares”) upon the achievement of certain product-related milestones described below.  In addition, the Company has reserved 38,630,723 shares of its Common Stock for possible future issuance in connection with the conversion of $15.45 million of outstanding Ariston convertible promissory notes.  The noteholders will not have any recourse to the Company for repayment of the notes (their sole recourse being to Ariston), but the noteholders will have the right to convert the notes into shares of the Company's Common Stock at the rate of $0.40 per share.  Further, the Company has reserved 5,000,000 shares of its Common Stock for possible future issuance in connection with the conversion of the $1.0 million outstanding Ariston convertible promissory note issued in satisfaction of a trade payable.  The noteholder will not have any recourse to the Company for repayment of the note (their sole recourse being to Ariston), but the noteholder will have the right to convert the note into shares of the Company's Common Stock at the rate of $0.20 per share.

Upon the achievement of the milestones described below, the Company would be obligated to issue portions of the Milestone Shares to the former Ariston stockholders and noteholders:

·

Upon the affirmative decision of the Company’s Board of Directors, provided that such decision is made prior to March 8, 2011, to further develop the AST-915, either internally or through a corporate partnership, the Company would issue 8,828,029 of the Milestone Shares.

·

Upon the acceptance by the FDA of the Company's filing of the first New Drug Application for the AST-726 product candidate, the Company would issue 7,062,423 of the Milestone Shares.

·

Upon the Company receiving FDA approval to market the AST-726 product candidate in the United States of America, the Company would issue 8,828,029 of the Milestone Shares.

Certain members and former members of the Company's board of directors and principal stockholders of the Company owned Ariston securities.  Timothy McInerney, a director of Manhattan, owned 16,668 shares of Ariston common stock which represented less than 1% of Ariston’s outstanding common stock as of the closing of the Merger.  Neil Herskowitz, a director of Manhattan, indirectly owned convertible promissory notes of Ariston with interest and principal in the amount of $192,739.  Michael Weiser, a director of Manhattan, owned 117,342 shares of Ariston common stock, which represented approximately 2.1% of Ariston’s outstanding common stock as of the closing of the Merger.  Lindsay Rosenwald, a more than 5% beneficial owner of Manhattan common stock, in his individual capacity and indirectly through trusts and companies he controls owned 497,911 shares of Ariston common stock, which represented approximately 8.9% of Ariston’s outstanding common stock as of the closing of the Merger and indirectly owned convertible promissory notes of Ariston in the amount of $141,438.

The Company merged with Ariston principally to add new products to our portfolio. Prior to the Merger, Ariston was a private, clinical stage specialty biopharmaceutical company based in Shrewsbury, Massachusetts that in-licensed, developed and planned to market novel therapeutics for the treatment of serious disorders of the central and peripheral nervous systems.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Merger date fair value of the total consideration paid was $1,491,937 which consisted of 7,062,423 shares of the Company’s common stock issued upon the Merger and 15,890,452 contingently issuable shares upon Ariston’s attaining certain milestones as described above.  The Company does not believe the attainment of the milestone for AST-915 is highly probable and has recorded no contingent consideration relative to it.  The par value of the contingently issuable common shares is reflected in the accompanying condensed consolidated balance sheets as of June 30, 2010 as a component of stockholders’ deficiency, contingently issuable shares.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Merger date:

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.	SHARE-BASED COMPENSATION

The Company has stockholder-approved stock incentive plans for employees, directors, officers and consultants.  Prior to January 1, 2006, the Company accounted for the employee, director and officer plans using the intrinsic value method. On January 1, 2006, the Company adopted the share-based payment method for employee options using the modified prospective transition method.  Under the modified prospective transition method, the Company recognized compensation cost for the quarters ended June 30, 2010 and 2009 which includes a) period compensation cost related to share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions; and b) period compensation cost related to share-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the new accounting methodology. In accordance with the modified prospective method, the Company has not restated prior period results.

The Company recognizes compensation expense related to stock option grants on a straight-line basis over the vesting period.    The Company recognized share-based compensation cost of $15,259 and $88,373 for the three month periods ended June 30, 2010 and 2009 respectively, and $206,141 and $192,470 for the six month periods ended June 30, 2010 and 2009, respectively.  The Company did not capitalize any share-based compensation cost.

 

Options granted to consultants and other non-employees are recorded at fair value at the date of grant and subsequently adjusted to fair value at the end of each reporting period until such options vest, and the fair value of the options, as adjusted, is amortized to consulting expense over the related vesting period.  Accordingly, such options are recorded at fair value at the date of grant and subsequently adjusted to fair value at the end of each reporting period until such options vest, and the fair value of the options, as adjusted, is amortized to consulting expense over the related vesting period.  As a result of adjusting consultant and other non-employee options to fair value, the Company recognized share-based compensation (credit) / cost of $(175) and $74, respectively, for the three-and six months ended June 30, 2009 and $392 and $770, respectively, for the three-and six months ended June 30, 2009.  The Company has allocated share-based compensation costs to general and administrative and research and development expenses as follows:

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
General and administrative expense:
Share-based employee compensation cost		$	15,434			$	87,981			$	206,067			$	191,700
Share-based consultant and non-employee cost			(17	)			39				7				77
			15,417				88,020				206,074				191,777
Research and development expense:
Share-based employee compensation cost			-				-				-				-
Share-based consultant and non-employee cost			(157	)			353				67				693
			(157	)			353				67				693
Total share-based cost		$	15,260			$	88,373			$	206,141			$	192,470

 

To compute compensation expense in 2010 and 2009 the Company estimated the fair value of each option award on the date of grant using the Black-Scholes model. The Company based the expected volatility assumption on a volatility index of peer companies as the Company did not have a sufficient number of years of historical volatility of its common stock.  The expected term of options granted represents the period of time that options are expected to be outstanding.  The Company estimated the expected term of stock options by the simplified method.  The expected forfeiture rates are based on the historical employee forfeiture experiences. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s awards.  The Company has not declared a dividend on its common stock since its inception and has no intentions of declaring a dividend in the foreseeable future and therefore used a dividend yield of zero.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table shows the weighted average assumptions the Company used to develop the fair value estimates for the determination of the compensation charges in 2010 and 2009:

 

		Six months ended June 30,
		2010				2009
Expected volatility			88	%			93	%
Dividend yield			-				-
Expected term (in years)			5.7				6
Risk-free interest rate			2.46	%			2.08	%

 

The Company has shareholder-approved incentive stock option plans for employees under which it has granted non-qualified and incentive stock options.  In December 2003, the Company established the 2003 Stock Option Plan (the “2003 Plan”), which provided for the granting of up to 5,400,000 options to officers, directors, employees and consultants for the purchase of stock.  In August 2005, the Company increased the number of shares of common stock reserved for issuance under the 2003 Plan by 2,000,000 shares.  In May 2007, the Company increased the number of shares of common stock reserved for issuance under the 2003 Plan by 3,000,000 shares.  In November 2009, the Company increased the number of shares of common stock reserved for issuance under the 2003 plan by an additional 4,600,000 shares.  At June 30, 2010, 15,000,000 shares were authorized for issuance.  The options have a maximum term of 10 years and vest over a period determined by the Company’s Board of Directors (generally 3 years) and are issued at an exercise price equal to or greater than the fair market value of the shares at the date of grant.  The 2003 Plan expires on December 10, 2013 or when all options have been granted, whichever is sooner. At June 30, 2010 options to purchase 11,574,936 shares were outstanding, 27,776 shares of common stock were issued and  there were 4,524,528 shares reserved for future grants under the 2003 Plan.

 

In July 1995, the Company established the 1995 Stock Option Plan (the”1995 Plan”), which provided for the granting of options to purchase up to 130,000 shares of the Company’s common stock to officers, directors, employees and consultants.  The 1995 Plan was amended several times to increase the number of shares reserved for stock option grants.  In June 2005 the 1995 Plan expired and no further options can be granted.   At June 30, 2010 options to purchase 1,127,240 shares were outstanding and no shares were reserved for future stock option grants under the 1995 Plan.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the status of the Company’s stock options as of June 30, 2010 and changes during the period then ended is presented below:

 

		Shares				Weighted average exercise price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at December 31, 2009			7,459,936			$	0.718				6.160
Granted			4,125,000			$	0.070				5.700
Exercised			-
Cancelled			10,000
Outstanding at June 30, 2010			11,574,936			$	0.487				6.430			$	-
Exercisable at June 30, 2010			9,983,269			$	0.554				5.920			$	-
Weighted-average fair value of options granted during the six month period ended June 30, 2010		$	0.046

 

As of June 30, 2010, the total compensation cost related to nonvested option awards not yet recognized is $67,763.  The weighted average period over which it is expected to be recognized is approximately 2.66 years.

 

5.	JOINT VENTURE

 

In February 2008, the Company and Nordic Biotech Advisors ApS through its investment fund Nordic Biotech Venture Fund II K/S (“Nordic”) entered into a joint venture agreement (the “Hedrin JV Agreement”) to develop and commercialize the Company's North American rights (under license) to its Hedrin product.

Pursuant to the Hedrin JV Agreement, Nordic formed a new Danish limited partnership, H Pharmaceuticals K/S, (the "Hedrin JV") and provided it with initial funding of $2.5 million and the Company assigned and transferred its North American rights in Hedrin to the Hedrin JV in return for a $2.0 million cash payment from the Hedrin JV and equity in the Hedrin JV representing 50% of the nominal equity interests in the Hedrin JV.  At closing the Company recognized an investment in the Hedrin JV of $250,000 and an exchange obligation of $2,054,630.  The exchange obligation represents the Company’s obligation to Nordic to issue the Company’s common stock in exchange for all or a portion of Nordic’s equity interest in the Hedrin JV upon the exercise by Nordic of the put issued to Nordic in the Hedrin JV Agreement transaction.  The put is described below.

In June 2008, Nordic invested an additional $1.0 million, for a total of $3.5 million, in the Hedrin JV and made an advance of $250,000 to the Hedrin JV and the Hedrin JV made an additional $1.0 million payment, for a total of $3.0 million, to the Company.  The Hedrin JV also distributed additional ownership equity sufficient for each of the Company and Nordic to maintain their ownership interest at 50%.  The FDA classified Hedrin as a Class III medical device in February 2009.  Upon attaining this classification of Hedrin by the FDA, Nordic invested an additional $1.25 million, for a total investment of $5 million, into the Hedrin JV,  the Hedrin JV paid an additional $0.5 million, for a total of $3.5 million, to the Company and the $250,000 that Nordic advanced to the Hedrin JV in June became an equity investment in the Hedrin JV by Nordic.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In February 2009, the Company’s exchange obligation increased by $1,000,000 and the Company’s investment in the Hedrin JV increased by $500,000 as a result of the investment by Nordic of an additional $1.25 million into the Hedrin JV, the reclassification of the advance made by Nordic in June 2008 to the Hedrin JV of $250,000 into an equity interest and the payment of $500,000 by the Hedrin JV to the Company. At June 30, ,2010, the Company’s exchange obligation is $3,949,176.

 

During the six months ended June 30, 2010 and 2009, the Company recognized $0 and $231,686, respectively, of equity in the losses of the Hedrin JV.  This reduced the carrying value of its investment in the Hedrin JV to $0 at June 30, 2010 and $268,314 at June 30, 2009.  As of June 30, 2010, the Company’s estimated share of the losses is $840,000; equity in losses previously recognized was $500,000 leaving an estimated balance of $340,000 of losses that was not recognized as of June 30, 2010.

 

The Hedrin JV is responsible for the development and commercialization of Hedrin for the North American market and all associated costs including clinical trials, if required, regulatory costs, patent costs, and future milestone payments owed to T&R, the licensor of Hedrin.

 

The Hedrin JV has engaged the Company to provide management services to the Limited Partnership in exchange for a management fee.  For the six months ended June 30, 2010 and 2009, the Company has recognized $150,000 and $183,845, respectively, of other income from management fees earned from the Hedrin JV which is included in the Company’s statements of operations for the six months ended June 30, 2010 and 2009 as a component of interest and other income.

 

As per the Limited Partnership Agreement between the Company and Nordic (the “LPA”) in the event that a limited partner in the Hedrin JV (a “Limited Partner”) determines, in its reasonable good faith discretion, that the Hedrin JV requires additional capital for the proper conduct of its business that Limited Partner shall provide each Limited Partner with a written request for contribution of such Limited Partner’s proportionate share, in accordance to the then respective equity ownership in the Hedrin JV, of such requested additional capital amount.

As per the terms of the LPA, if a Limited Partner declines to so contribute, elects to contribute but thereafter fails to do so timely, or elects to contribute and timely does contribute some, but not all of, its proportionate share of the requested additional capital amount, the other Limited Partner shall have the option to contribute the remaining balance of such requested additional capital amount.

As per the terms of the LPA, the General Partner shall determine the fair market value of the shares for purposes of determining how to allocate the number of shares of the Hedrin JV to be issued in consideration for the contribution of capital.  If the General Partner is unable to determine the fair market value of the shares, the fair market value for the shares shall be determined in good faith by the contributing Limited Partner if such amount is equal to or greater than the most recent valuation of such Hedrin JV shares.

 

On December 31, 2009, Nordic Biotech Venture Fund II (“Nordic”) delivered a written notice to the Company for a $1,000,000 capital increase to the Hedrin JV.  In January 2010, Nordic made its capital contribution to the Hedrin JV of $500,000.  The Company did not have sufficient funds to make such a capital contribution within the required time prescribed in the LPA.

The General Partner was unable to determine the fair market value of the shares.  The contributing Limited Partner, Nordic, determined in good faith that the fair market value of the shares is equal to the most recent valuation.  The most recent valuation was the February 2009 investment of $1,500,000 into the Hedrin JV by Nordic at $5,000 per share.  As a result of Nordic’s investing an additional $500,000 in the Hedrin JV the ownership percentages of the Hedrin JV have changed from 50% to Nordic and 50% for the Company to 52.38% to Nordic and 47.62% for the Company.  In the event that Nordic exercises its option to invest the remaining $500,000 of the $1,000,000 capital increase then the ownership percentage shall change to 54.55% for Nordic and 45.45% for the Company.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In April 2010 Nordic filed a Schedule 13D/A (the “ Amended 13D ”) with the SEC. The Company is not in agreement with the Amended 13D and has written a letter to Nordic explaining its disagreements.  The Amended 13D shows an aggregate number of shares of the Company’s common stock beneficially owned by Nordic of 216,666,666, or 65.5%.  The Company believes the correct beneficial ownership is 85,714,286 shares, or 42.9%.  The Amended 13D/A states that Nordic does not believe the Company’s determination of the anti-dilution shares accruing to Nordic as a result of the 2010 Equity Financing was neither reasonable nor made in good faith.  As the Company has previously stated we believe our determination was both reasonable and made in good faith.  The Amended 13D/A further states that Nordic acquired the right to purchase an additional 5,555,556 shares of the Company’s common stock upon exercise of the Nordic Put as a result of Nordic’s making an additional investment in the Hedrin JV of $500,000 in January 2010.  The Company is not in agreement with this claim and there is no adjustment to Nordic’s Put as a result of Nordic making additional capital contributions to the Hedrin JV.  In the letter to Nordic the Company also points out that Nordic’s valuation suggestions for the warrants issued in the 2010 Equity Financing ignore the concept of relative value inherent in the Hedrin JV Agreement.

6.	NOTES PAYABLE

The following is a summary of Notes Payable at June 30, 2010:

		Current portion, net				Noncurrent portion, net				Total
Secured 10% Notes Payable		$	-			$	-			$	-
Secured 12% Notes Payable			1,679,387				-				1,679,387
8% Note Payable			-				-				-
Non-interest Bearing Note Payable			-				221,900				221,900
Convertible 12% Note Payable			-				-				-
Convertible 5% Notes Payable			-				15,452,793				15,452,793
ICON Convertible Note Payable			333,333				583,333				916,666
Total		$	2,012,720			$	16,258,026			$	18,270,746

a.            Secured 10% Notes Payable

In September 2008, Manhattan entered into a series of Secured 10% Notes (the “Secured 10% Notes”) with certain of our directors, officers and an employee (the “Secured 10% Note Holders”) for aggregate of $70,000.   Principal and interest on the Secured 10% Notes shall be paid in cash on March 10, 2009 unless paid earlier by us.  Pursuant to the Secured 10% Notes, we also issued to the Secured 10% Note Holders 5-year warrants to purchase an aggregate of 140,000 shares of our common stock at an exercise price of $0.20 per share.  Manhattan granted to the Secured 10% Note Holders a continuing security interest in certain specific refunds, deposits and repayments due Manhattan and expected to be repaid to Manhattan in the next several months.  The Secured 10% Notes plus interest were repaid on February 4, 2009.

b.           Secured 12% Notes Payable

On November 19, 2008, December 23, 2008 and February 3, 2009, the Company completed the first, second and final closings on a financing transaction (the “Secured 12% Notes Transaction”).  The Company sold $1,725,000 of 12% senior secured notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase 57.5 million shares of the Company’s common stock at $0.09 per share.  The warrants expire on December 31, 2013.  Net proceeds of $1.4 million were realized from the three closings.  In addition, $78,000 of issuance costs were paid outside of the closings.   Per the terms of the 12% Notes Transaction the net proceeds were paid into a deposit account  (the “Deposit Account”) and are to be paid out to the Company in monthly installments of $113,300 retroactive to October 1, 2008 and a one-time payment of $200,000.  Per the terms of the 12% Notes Transaction the monthly installments are to be used exclusively to fund the current operating expenses of the Company and the one-time payment was to be used for trade payables incurred prior to October 1, 2008.  The Company received $876,700 of such monthly installments and the one time payment of $200,000 during the year ended December 31, 2009.  There was no remaining balance in the Deposit Account at December 31, 2009.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

National Securities Corporation (“National”) was the placement agent for the Secured 12% Notes Transaction.  National’s compensation for acting as placement agent is a cash fee of 10% of the gross proceeds received, a non-accountable expense allowance of 1.5% of the gross proceeds, reimbursement of certain expenses and a warrant to purchase such number of shares of the Company’s common stock equal to 15% of the shares underlying the warrants issued to the investors.  The Company paid National a total of $202,000 in placement agent fees, a non-accountable expense allowance and reimbursement of certain expenses.  In addition, the Company issued warrants to purchase 8.6 million shares of the Company’s common stock at $0.09 per share.  These warrants were valued at $29,110 and are a component of Secured 12% notes payable issue costs.  The warrants expire on December 31, 2013.

 

The Secured 12% Notes mature two years after issuance.  Interest on the Secured 12% Notes is compounded quarterly and payable at maturity.  At June 30, 2010 and December 31, 2009, accrued and unpaid interest on the Secured 12% Notes amounted to approximately $352,000 and $229,000, and is reflected in the accompanying balance sheets at June 30, 2010 and December 31, 2009, respectively, as part of  interest payable. The Secured 12% Notes are secured by a pledge of all of the Company’s assets except for its investment in the Hedrin JV.  In addition, to provide additional security for the Company’s obligations under the notes, the Company entered into a default agreement, which provides that upon an event of default under the notes, the Company shall, at the request of the holders of the notes, use reasonable commercial efforts to either (i) sell a part or all of the Company’s interests in the Hedrin joint venture or (ii) transfer all or part of the Company’s interest in the Hedrin JV to the holders of the notes, as necessary, in order to fulfill the Company’s obligations under the notes, to the extent required and to the extent permitted by the applicable Hedrin joint venture agreements.

 

In connection with the private placement, the Company, the placement agent and the investors entered into a registration rights agreement.  Pursuant to the registration rights agreement, we agreed to file a registration statement to register the resale of the shares of our common stock issuable upon exercise of the warrants issued to the investors in the private placement, within 20 days of the final closing date and to cause the registration statement to be declared effective within 90 days (or 120 days upon full review by the Securities and Exchange Commission). During the year ended December 31, 2009 we filed the registration statement, received a comment letter from the SEC and responded to the comment letter from the SEC.  The registration statement was declared effective on April 17, 2009.

 

The Company incurred a total of approximately $424,000 of costs in the issuance of the $1,725,000 of Secured 12% Notes sold in 2008 and  2009.  These costs were capitalized and are being amortized over the life of the Secured 12% Notes into interest expense.  During the six months ended June 30, 2010 and the year ended December 31, 2009, the amount amortized into interest expense was approximately $104,000 and $206,000, respectively.  The remaining unamortized balance of approximately $96,000 and $201,000 is reflected in the accompanying balance sheets as of June 30, 2010 and December 31, 2009, respectively, as debt issue costs.

 

The Company recognized an original issue discount (the “OID”) of approximately $194,000 on the issuance of the Secured 12% Notes sold for the value of the warrants issued to the investors.  The OID is being amortized over the life of the Secured 12% Notes into interest expense.  During the six months ended June 30, 2010 and year ended December 31, 2009 the amount amortized into interest expense was approximately $48,000 and $94,000, respectively.  The remaining unamortized balance of approximately $46,000 and $93,000 has been netted against the face amount of Notes Payable in the accompanying balance sheets as of June 30, 2010 and December 31, 2009, respectively.  As per the terms of the 12% Notes Transaction the Company’s officers agreed to certain modifications of their employment agreements.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

c.           8% Note Payable

On December 21, 2009, the Company entered into a Future Advance Promissory Note (the “8% Note”) with Ariston under which the Company may withdraw up to $67,000 bearing interest at a rate of 8%.   As of December 31, 2009, the Company had withdrawn $27,000 from Ariston subject to the terms of the 8% Note.  On January 13, 2010, the Company withdrew an additional $20,000 subject to the 8% Note and on January 28, 2010, the Company withdrew an additional $20,000 subject to the 8% Note.

 

On March 4, 2010, the Company repaid Ariston the $67,000 withdrawn subject to the 8% Note and accrued interest of $816.

 

d.           Non-interest Bearing Note Payable

On October 27, 2009, the Company entered into a Settlement Agreement and Mutual Release with Swiss Pharma Contract LTD (“Swiss Pharma”) pursuant to which the Company agreed to pay Swiss Pharma $200,000 and issue to Swiss Pharma an interest free promissory note in the principal amount of $250,000 in full satisfaction of the September 5, 2008 arbitration award. The amount of the Arbitration award was $683,027 at September 30, 2009 and was included as a component of accrued expenses.

In connection with the non-interest bearing note, the Company recognized an original issue discount of  $40,000 of imputed interest on the note, which is being amortized into interest expense on a straight-line basis over the two-year term of the note.  For the six months ended June 30, 2010 and the year ended December 31, 2009, the Company amortized $10,000 and $1,900 of the OID into interest expense, respectively.  The remaining unamortized balance of $28,100 has been netted against the face amount of Notes Payable in the accompanying balance sheet as of June 30, 2010.

 e.           Convertible 12% Note Payable

In conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma described above, on October 28, 2009, the Company entered into a Subscription Agreement (the “Subscription Agreement”) pursuant to which it sold a 12% Original Issue Discount Senior Subordinated Convertible Debenture with a stated value of $400,000 (the “Convertible 12% Note”) and a warrant to purchase 2,222,222 shares of the Company’s common stock, par value $.001 per share  for a purchase price of $200,000.  The Convertible 12% Note is convertible into shares of Common Stock at an initial conversion price of $0.09 per share, subject to adjustment, or, in the event the Company issues new securities in connection with a financing, the Convertible 12% Note may be converted into such new securities at a conversion price equal to the purchase price paid by the purchasers of such new securities.  The Company may also, in its sole discretion, elect to pay interest due on the Convertible 12% Note quarterly in shares of the Company’s common stock provided such shares are subject to an effective registration statement.  The Convertible 12% Note is subordinated to the Company’s outstanding Secured 12% Notes.  The Warrant is exercisable at an exercise price of $0.11 per share, subject to adjustment.  Because the Convertible 12% Note and the Warrant are convertible into shares of the Company, subject to adjustment, the conversion feature is subject to Derivative Liability accounting (see Note 8).

National Securities Corporation (“National”) was the placement agent for the Convertible 12% Note transaction.  In connection with the issuance of the Securities, the Company issued warrants to purchase an aggregate of 222,222 shares of Common Stock at an exercise price of $0.11 per share, subject to adjustment, to the placement agent and certain of its designees.  Because the warrant is convertible into shares of the Company, subject to adjustment, the warrants are subject to Derivative Liability accounting (see Note 8). The warrants expire on October 28, 2014.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  

On April 8, 2010, the holder (the "Noteholder") of the outstanding Convertible12% Note, dated October 28, 2009, with a stated value of $400,000 and $22,000 of accrued interest, exercised its option to convert its note (including all accrued interest thereon into 16.88 Units (as described in Note 7).  The conversion price was equal to the per Unit purchase price paid by the Investors in the private placement.  As a result of this conversion, the Company accelerated the amortization of approximately $30,000 in issue costs and $160,000 original issue discount, which is reflected as a loss on early extinguishment in the accompanying statement of operations for the six months ended June 30, 2010.

 

f.             Convertible 5% Notes Payable

Upon the Merger, Ariston issued $15,452,793 of five-year 5% notes payable (the “5% Notes Payable”) in satisfaction of several note payable issuances.  The cumulative liability including accrued and unpaid interest of these several issuances of notes was $15,452,793 as of the Merger date.  Interest is payable at maturity and compounds annually.  The 5% Notes Payable and accrued and unpaid interest thereon are convertible at the option of the holder into the Company’s common stock at the conversion price of $0.40 per share.  Ariston agreed to make quarterly payments on the 5% Notes Payable equal to 50% of the gross proceeds resulting from the revenues received from the exploitation or commercialization of Ariston’s product candidates, AST-726 and AST-915.  The 5% Notes Payable are solely the obligation of Ariston and have no recourse to the Company other than the conversion feature discussed above.  For the six months ended June 30, 2010, the Company recorded approximately $240,000 in accrued interest, which is reflected as a component of Interest Payable Noncurrent Portion in the accompanying balance sheet as of June 30, 2010.

g.            ICON Convertible Note Payable

Upon the Merger, Ariston satisfied an account payable of $1,275,188 to ICON Clinical Research Limited through the payment of $275,188 in cash and the issuance of a three-year 5% note payable (the “ICON Note Payable”).  The principal is to be repaid in 36 monthly installments of $27,778 commencing in April 2010.  Interest is payable monthly in arrears.   The ICON Convertible Note Payable is convertible at the option of the holder into the Company’s common stock at the conversion price of $0.20 per share.  During the six months ended June 30, 2010, the Company has paid approximately $98,000 in principal and interest to ICON.  For the six months ended June 30, 2010, the Company recorded approximately $15,000 in interest expense as reflected on the accompanying statement of operations for the six months ended June 30, 2010.

7.	2010 EQUITY FINANCING

On March 2, 2010, the Company raised aggregate gross proceeds of approximately $2,547,500 pursuant to a private placement of its securities (the “2010 Equity Financing”).  The Company entered into subscription agreements (the "Subscription Agreements") with seventy-seven accredited investors (the "Investors") pursuant to which the Company sold an aggregate of 101.9 Units (as defined herein) for a purchase price of $25,000 per Unit.  Pursuant to the Subscription Agreements, the Company issued to each Investor units (the "Units") consisting of (i) 357,143 shares of common stock, $0.001 par value per share (the “Common Stock” or “Shares”) of the Company and (ii) 535,714 warrants (each a “Warrant” and collectively the “Warrants”), each of which will entitle the holder to purchase one additional share of Common Stock for a period of five years (each a “Warrant Share” and collectively the “Warrant Shares”) at an exercise price of $0.08 per share.  Because the Warrant Shares are convertible into shares of the Company, subject to adjustment, the conversion feature is subject to Derivative Liability accounting (see Note 8).

National was the placement agent for the 2010 Equity Financing transaction.  In connection with the issuance of the Securities, the Company issued warrants to purchase an aggregate of 3,369,289 shares of Common Stock at an exercise price of $0.08 per share, subject to adjustment, to the placement agent and certain of its designees.  Because the warrant is convertible into shares of the Company, subject to adjustment, the warrants are subject to Derivative Liability accounting (see Note 8). The warrants expire on March 2, 2015.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Nordic Put and Nordic Warrant were issued at a value of $0.14 per share and were issued with anti-dilution rights. The issuance of any securities at a value of less than $0.14 per share activates Nordic’s anti-dilution rights. The Secured 12% Note transaction included warrants with an exercise price of $0.09 per share, this activated Nordic’s anti-dilution rights as reflected in the table below under the caption “Before the Equity Pipe Transaction”.  Any issuances of any securities subsequent to the Secured 12% Note transaction at a value of less than $0.09 further activates Nordic’s anti-dilution rights.  The Equity Pipe transaction in March 2010 effectively included the sale of one share of common stock and a warrant to purchase 1.5 shares of common stock for a price of $0.07. The JV Agreement between Nordic and Manhattan governs the antidilution protection to Nordic.  Section 5.1 of that agreement state “If shares of Common Stock or Common Stock Equivalents are issued or sold together with other stock or securities or other assets of MHA (Manhattan) for a consideration which covers both, the effective price per share shall be computed with regard to the portion of the consideration so received that may reasonably be determined in good faith by the Board of Directors, to be allocable to such Common Stock or Common Stock Equivalent.”  The good faith determination of the effective price per share was $0.07 for each share of common stock sold and a de minimus value to the warrants.  The Nordic Put and the Nordic Warrant are now valued at a price of $0.07 per share.  The following table shows the effect of Nordic’s anti-dilution rights.

 

		Shares Issuable Upon Exercise of Nordic's Put				Shares Issuable Upon Exercise of Nordic's Warrant				Total Shares Issuable Upon Exercise of Nordic's Put and Warrant
Before the Equity Pipe Transaction			55,555,556				11,111,111				66,666,667
Antidilution shares			15,873,015				3,174,603				19,047,618
After the Equity Pipe Transaction			71,428,571				14,285,714				85,714,285

In March 2010, we received correspondence from Nordic that questions how we calculated the anti-dilution shares, as shown above, and suggesting that we did not employ a good faith estimate.  We believe our determination was made in good faith and is appropriate. See Note 5.

 

All of the Investors represented that they were “accredited investors,” as that term is defined in Rule 501(a) of Regulation D under the Securities Act, and the sale of the Units was made in reliance on exemptions provided by Regulation D and Section 4(2) of the Securities Act of 1933, as amended.

 

In connection with the closing of the private placement, the Company, the placement agent acting in connection with the private placement (the “Placement Agent”) and the Investors entered into a Registration Rights Agreement, dated as of March 2, 2010, and the Company agreed to file a registration statement to register the resale of the Shares, within 60 days of the final closing date and to cause the registration statement to be declared effective within 150 days (or 180 days upon review by the SEC).

 

The Company received net proceeds of approximately $2,100,000 after payment of an aggregate of approximately $300,000 of commissions and expense allowance to the Placement Agent, and approximately $100,000 of other offering and related costs in connection with the private placement. In addition, the Company issued a warrant to purchase 3,639,289 shares of Common Stock at an exercise price of $0.08 per share to the Placement Agent as additional compensation for its services.

 

The Company did not use any form of advertising or general solicitation in connection with the sale of the Units. The Shares, the Warrants and the Warrant Shares are non-transferable in the absence of an effective registration statement under the Act, or an available exemption therefrom, and all certificates are imprinted with a restrictive legend to that effect.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On April 8, 2010, the Company completed the final closing of the 2010 Equity Financing.  In connection with the final closing, the Company sold an aggregate of 2.4 additional Units and received net proceeds of approximately $51,700 after payment of an aggregate of $8,300 of commissions and expense allowance to placement agent. In connection with the final closing, the Company also issued a warrant to purchase 12,857 shares of Common Stock at an exercise price of $0.08 per share to the placement agent as additional compensation for its services.

In addition on April 8, 2010, the holder of the Convertible 12% Note (see Note 6) with a stated value of $400,000 and $22,000 of accrued interest, exercised its option to convert its Debenture (including all accrued interest thereon) into 16.88 Units.  The conversion price was equal to the per Unit purchase price paid by the Investors in the private placement.

The Company issued a total of 6,885,717 shares of common stock and warrants to purchase 10,328,566 shares of common stock at an exercise price of $0.08 per share to the investors in the final closing of the 2010 Equity Financing, including the conversion of the 12% Convertible Note.

 

8.	DERIVATIVE LIABILITY

 

In April 2008, the FASB issued a pronouncement which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We evaluated whether warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective warrant agreements. We determined that the warrant issued to Nordic in April 2008 (the “Nordic Warrant”), the warrants issued in connection with the 2009 sale of the Convertible 12% Note Payable and its subsequent conversion in April 2010, and the warrants issued in connection with the 2010 Equity Financing contained such provisions, thereby concluding they were not indexed to the Company’s own stock and were reclassified from equity to derivative liabilities.

 

In accordance with this pronouncement, the Company estimated the fair value of the Nordic Warrant as of January 1, 2009 to be $22,222 by recording a reduction in additional paid-in capital of $150,000 and a decrease in deficit accumulated during the development stage of $127,778. The effect of this adjustment is recorded as a cumulative effect of change in accounting principle in our statements of stockholders’ equity (deficiency).  As of June 30, 2010, the fair value of these derivatives was $350,000 as recorded in the accompanying balance sheet as of June 30, 2010, as a component of a current liability, derivative liability. The change of $(465,714) and $(133,333) in fair value during the three and six months ended June 30, 2010, respectively, is reported as a noncash charge in the accompanying consolidated statements of operations as a component of other (income) expense.

In accordance with this pronouncement the Company estimated the fair value at the date of issuance of the conversion feature of the Convertible 12% Note and the fair value of the related warrants to purchase 2,444,444 shares of the Company’s common stock at $175,100 and $27,390, respectively.  On April 8, 2010, the holder of the Convertible 12% Note exercised his option to convert.  As a result, the derivative liability associated with the notes were reclassified to Convertible 12% Note Payable with the change in fair value from the date of issuance $29,506 reclassified as a loss on early extinguishment of debt in the accompanying statement of operations for the six months ended June 30, 2010.  As of June 30, 2010 the fair value of these derivatives related to the warrants outstanding totaled $67,956 and are recorded in the accompanying balance sheet as of June 30, 2010 as a component of derivative liability.  The change in fair value of $(81,889) and $(53,044) during the three and six months ended June 30, 2010, respectively, is reported as a non-cash charge in the accompanying consolidated statements of operations as a component of other (income) expense.

 

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(a Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In addition, in accordance with this pronouncement, the Company estimated the fair value at the date of issuance of the  9,042,853 warrants issued in connection with the conversion of the Convertible 12% Note at $528,103.  As of June 30, 2010, the fair value of these derivatives was $236,018 as recorded in the accompanying balance sheet as of June 30, 2010, as a component of a current liability, derivative liability.  The change of $(292,084) in fair value during the quarter ended June 30, 2010 is reported as a non-cash charge in the accompanying consolidated statements of operations as a component of other (income) expense.

 

Additionally, in accordance with this pronouncement the Company estimated the fair value at the date of issuance of the 54,589,266 warrants issued in connection with the 2010 Equity Financing and the fair value of the related 3,369,289 warrants issued to the placement agents in the 2010 Equity Financing  at $2,713,087  and $180,873, respectively.  As of June 30, 2010 the fair value of these derivatives totaled $1,502,297 and are recorded in the accompanying consolidated balance sheet as of June 30, 2010 as a component of derivative liability.  The change in fair value of $(1,927,365) during the quarter ended June 30, 2010 is reported as a non-cash charge in the consolidated statements of operations as a component of other (income) expense.

Additionally, in accordance with this pronouncement the Company estimated the fair value at the date of issuance of the 1,285,714 warrants issued in connection with the final closing of the 2010 Equity Financing in April 2010 and the fair value of the related 12,857 warrants issued to the placement agents in the final closing of the 2010 Equity Financing  at $75,086  and $751, respectively.  As of June 30, 2010 the fair value of these derivatives totaled $33,893 and are recorded in the accompanying consolidated balance sheet as of June 30, 2010 as a component of derivative liability.  The change in fair value of $(41,944) during the quarter ended June 30, 2010 is reported as a non-cash charge in the accompanying consolidated statement of operations as a component of other (income) expense.

 

9.	SUBSEQUENT EVENT

In July 2010, Nordic delivered a written notice to the Company for a $500,000 capital increase to the Hedrin JV and made a $500,000 capital contribution.  The Company does not regard either the notice or the capital contribution as being properly made as per the agreements between Nordic and the Company.  No valuation has been set for this capital contribution.  The Company reserved its right to make its pro rata share of the capital contribution, but has not yet determined whether to make the capital contribution or not.  Nordic may dispute the Company’s right to make its pro rata share of the capital contribution.

 

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

 

You should read the following discussion of our results of operations and financial condition in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”) and our financial statements for the six month period ended June 30, 2010 included elsewhere in this report.

 

We were incorporated in Delaware in 1993 under the name “Atlantic Pharmaceuticals, Inc.” and, in March 2000, we changed our name to “Atlantic Technology Ventures, Inc.”  In 2003, we completed a “reverse acquisition” of privately held “Manhattan Research Development, Inc”.  In connection with this transaction, we also changed our name to “Manhattan Pharmaceuticals, Inc.”  From an accounting perspective, the accounting acquirer is considered to be Manhattan Research Development, Inc. and accordingly, the historical financial statements are those of Manhattan Research Development, Inc.

 

During 2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was a privately held New York based biopharmaceutical company developing dermatological therapeutics.    This transaction was accounted for as a purchase of Tarpan by the Company.

 

On March 8, 2010, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware corporation ("Ariston") and Ariston Merger Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the "Merger Sub").  Pursuant to the terms and conditions set forth in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston (the "Merger"), with Ariston being the surviving corporation of the Merger.  As a result of the Merger, Ariston became a wholly-owned subsidiary of the Company.  The operating results of Ariston from March 8, 2010 to June 30, 2010 are included in the accompanying Condensed Consolidated Statements of Operations.  The Condensed Consolidated Balance Sheet as of June 30, 2010 reflects the acquisition of Ariston, effective March 8, 2010, the date of the Merger.

 

We are a specialty healthcare product company focused on developing and commercializing pharmaceutical treatments for underserved patient populations.  We aim to acquire rights to these technologies by licensing or otherwise acquiring an ownership interest, funding their research and development and eventually either bringing the technologies to market or out-licensing.

 

This discussion includes “forward-looking” statements that reflect our current views with respect to future events and financial performance.  We use words such as we “expect,” “anticipate,” “believe,” and “intend” and similar expressions to identify forward-looking statements.  Investors should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events, particularly those risks identified under the heading “Risk Factors” following Item 1 in the Annual Report, and should not unduly rely on these forward looking statements.

 

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Results of Operations

 

Six-month Periods ended June 30, 2010 vs 2009:

 

		Six Months ended June 30,								Increase/				% Increase/
		2010				2009				(decrease)				(decrease)
Costs and expenses:
Research and development:
Share-based compensation		$	-			$	1,000			$	(1,000	)			-100.00	%
Other research and development expenses			69,000				51,000				18,000				35.29	%
Total research and development expenses			69,000				52,000				17,000				32.69	%
General and administrative:
Share-based compensation			206,000				192,000				14,000				7.29	%
Other general and administrative expenses			780,000				791,000				(11,000	)			-1.39	%
Total general and administrative expenses			986,000				983,000				3,000				0.31	%
Other income/(expense):
Equity in losses of Hedrin JV			-				(232,000	)			232,000				-100.00	%
Change in fair value of derivative			1,867,000				(817,000	)			2,684,000				-328.52	%
Loss on early extinguishment of debt			(159,000	)			-				(159,000	)			N/A
Interest expense			(588,000	)			(259,000	)			(329,000	)			127.03	%
Interest and other income			152,000				189,000				(37,000	)			-19.58	%
Total other income/(expense)			1,272,000				(1,119,000	)			2,391,000				-213.67	%
Net income/(loss)		$	217,000			$	(2,154,000	)		$	2,371,000				-110.07	%

During each of the six month periods ended June 30, 2010 and 2009, we did not recognize any revenues.  We are considered a development stage company and do not expect to have revenues relating to our products candidates prior to June 30, 2011, if at all.

 

For the six months ended June 30, 2010 research and development expense was $69,000 as compared to $52,000 for the six months ended June 30, 2009.  This increase of $17,000, or 33%, is primarily due to commencement of development activity on our AST-726 project during the 2010 period and limited product development activity during the 2009 period.

 

For the six months  ended June 30, 2010 general and administrative expense was $986,000 as compared to $983,000 for the six months ended June30, 2009.  This increase of $3,000 is less than 1%.

 

For the six months ended June 30, 2010 other income/(expense) was $1,272,000 as compared to $(1,119,000) for the six months ended June 30, 2009.  This change of $2,391,000, or (214)%, is primarily due to a change in fair value of a derivative of $2,684,000 and a decrease in equity in losses of Hedrin JV of $232,000, offset by an increase in interest expense of $329,000, an increase of $159,000 in loss on early extinguishment of debt and a decrease in other income of $37,000.

 

Net income for the six months ended June 30, 2010 was $217,000 as compared to a net loss of $2,154,000 for the six months ended June 30, 2009.  This change of $2,371,000, or 110%, is primarily due to a change in fair value of a derivative of $2,684,000.

 

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Three-month Periods ended June 30, 2010 vs 2009:

		Three Months ended June 30,								Increase/				% Increase/
		2010				2009				(decrease)				(decrease)
Costs and expenses:
Research and development:
Share-based compensation		$	-			$	-			$	-				N/A
Other research and development expenses			51,000				7,000				44,000				628.57	%
Total research and development expenses			51,000				7,000				44,000				628.57	%
General and administrative:
Share-based compensation			15,000				88,000				(73,000	)			-82.95	%
Other general and administrative expenses			460,000				382,000				78,000				20.42	%
Total general and administrative expenses			475,000				470,000				5,000				1.06	%
Other income/(expense):
Equity in losses of Hedrin JV			-				(96,000	)			96,000				-100.00	%
Change in fair value of derivative			2,809,000				(747,000	)			3,556,000				-476.04	%
Loss on early extinguishment of debt			(159,000	)			-				(159,000	)			N/A
Interest expense			(351,000	)			(134,000	)			(217,000	)			161.94	%
Interest and other income			77,000				62,000				15,000				24.19	%
Total other income/(expense)			2,376,000				(915,000	)			3,291,000				-359.67	%
Net income/(loss)		$	1,850,000			$	(1,392,000	)		$	3,242,000				-232.90	%

For the three months ended June 30, 2010 research and development expense was $51,000 as compared to $7,000 for the three months ended June 30, 2009.  This increase of $44,000, or 629%, is primarily due to commencement of development activity on our AST-726 project during the 2010 period and limited product development activity during the 2009 period.

 

For the three months ended June 30, 2010 general and administrative expense was $475,000 as compared to $470,000 for the three months ended June30, 2009.  This increase of $5,000 is approximately 1%.

 

For the three months ended June 30, 2010 other income/(expense) was $2,376,000 as compared to $(915,000) for the three months ended June 30, 2009.  This change of $3,291,000, or (360)%, is primarily due to a change in fair value of a derivative of $3,556,000, a decrease in equity in losses of Hedrin JV of $96,000 and a increase in other income of $15,000 offset by an increase in interest expense of $217,000 and an increase of $159,000 in loss on early extinguishment of debt.

 

Net income for the three months ended June 30, 2010 was $1,850,000 as compared to a net loss of $1,392,000 for the three months ended June 30, 2009.  This change of $3,242,000, or 233%, is primarily due to a change in fair value of a derivative of $3,556,000, which resulted from a decrease in the market price of our stock.

Liquidity and Capital Resources

 

From inception to June 30, 2010, we incurred a deficit during the development stage of $61,716,000 primarily as a result of our net losses, and we expect to continue to incur additional losses through at least June 30, 2011 and for the foreseeable future.  These losses have been incurred through a combination of research and development activities related to the various technologies under our control and expenses supporting those activities.

 

We have financed our operations since inception primarily through equity and debt financings and a joint venture transaction.  During the six months  ended June 30, 2010, we had a net increase in cash and cash equivalents of $1.6 million.  This increase resulted largely from net cash provided by financing activities of $2.2 million and $0.5 million of cash acquired in the Ariston merger partially offset by net cash used in operating activities of $1.1 million.  Total liquid resources as of June 30, 2010 were $1.6 million compared to $18,000 at December 31, 2009.

 

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Our current liabilities as of June 30, 2010 were $4,928,000 compared to $2,532,000 at December 31, 2009, an increase of $2,396,000.  As of June 30, 2010, we had working capital deficit of $3,102,000 compared to working capital deficit of $2,268,000 at December 31, 2009.

 

The Company received net proceeds of approximately $2,200,000 in March and April 2010 from the 2010 Equity Financing.  In addition $400,000 principal amount of debt converted into the 2010 Equity Financing.  The Company also acquired $519,000 of cash in the merger with Ariston.

 

Our available working capital and capital requirements will depend upon numerous factors, including progress of our research and development programs, our progress in and the cost of ongoing and planned nonclinical and clinical testing, the timing and cost of obtaining regulatory approvals, the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights, in-licensing activities, competing technological and market developments, changes in our existing collaborative and licensing relationships, the resources that we devote to developing manufacturing and commercializing capabilities, the status of our competitors, our ability to establish collaborative arrangements with other organizations and our need to purchase additional capital equipment.

 

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements, strategic alliances, and our ability to realize the full potential of our technology in development.  Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term.  Through June 30, 2010, a significant portion of our financing has been through private placements of common stock and warrants.  Unless our operations generate significant revenues and cash flows from operating activities, we will continue to fund operations from cash on hand and through the similar sources of capital previously described.  We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.  We believe that we will continue to incur net losses and negative cash flows from operating activities for the foreseeable future.

 

Based on the resources of the Company available at June 30, 2010, management believes that the Company has sufficient capital to fund its operations through 2010.  Management believes that the Company will need additional equity or debt financing or will need to generate positive cash flow from the Hedrin JV, or generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations into 2011.  Furthermore, the Company will need additional financing thereafter to complete development and commercialization of its products.  There can be no assurances that we can successfully complete development and commercialization of our products.

 

These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We have reported net income  of $217,000 for the six month periods ended June 30, 2010 and a net loss of $2,154,000 for the six month periods ended June 30, 2009.  The net loss attributable to common shares from date of inception, including preferred stock dividends, August 6, 2001 to June 30, 2010, amounts to $61,716,000.  Management believes that we will continue to incur net losses through at least June 30, 2011.

 

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Joint Venture Agreement

 

We and Nordic Biotech Venture Fund II K/S, or Nordic, entered into a joint venture agreement on January 31, 2008, which was amended on February 18, 2008 and on June 9, 2008.  Pursuant to the joint venture agreement, in February 2008, (i) Nordic contributed cash in the amount of $2.5 million to H Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed Danish limited partnership, or the Hedrin JV, in exchange for 50% of the equity interests in the Hedrin JV, and (ii) we contributed certain assets to North American rights (under license) to our Hedrin product to the Hedrin JV in exchange for $2.0 million in cash and 50% of the equity interests in the Hedrin JV.  On or around June 30, 2008, in accordance with the terms of the joint venture agreement, Nordic contributed an additional $1.25 million in cash to the Hedrin JV, $1.0 million of which was distributed to us and equity in the Hedrin JV was distributed to each of us and Nordic sufficient to maintain our respective ownership interests at 50%.

Pursuant to the joint venture agreement, upon the classification by the U.S. Food and Drug Administration, or the FDA, of Hedrin as a Class II or Class III medical device, Nordic was required to contribute to the Hedrin JV an additional $1.25 million in cash, $0.5 million of which was to be distributed to us and equity in the Hedrin JV was to be distributed to each of us and Nordic sufficient to maintain our respective ownership interests at 50%.    The FDA notified the Hedrin JV that Hedrin has been classified as a Class III medical device and in February 2009, Nordic made the $1.25 million investment in the Hedrin JV, the Hedrin JV made the $0.5 million milestone payment to us and equity in the Hedrin JV was distributed to us and Nordic sufficient to maintain our respective ownership interests at 50%.

The Hedrin JV is responsible for the development and commercialization of Hedrin for the North American market and all associated costs including clinical trials, if required, regulatory costs, patent costs, and future milestone payments owed to Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The Hedrin JV has engaged us to provide management services to the Hedrin JV in exchange for an annualized management fee, which for the six month periods ended June 30, 2010 and 2009 was approximately $150,000 and $184,000, respectively.

 

The profits of the Hedrin JV will be shared by us and Nordic in accordance with our respective equity interests in the Hedrin JV, of which we each currently hold 47.62%, except that Nordic is entitled to receive a minimum return each year from the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in Nordic’s equity interest in the Hedrin JV, before any distribution is made to us.  If the Hedrin JV realizes a profit in excess of the Nordic minimum return in any year, then such excess shall first be distributed to us until our distribution and the Nordic minimum return are in the same ratio as our respective equity interests in the Hedrin JV and then the remainder, if any, is distributed to Nordic and us in the same ratio as our respective equity interests.  However, in the event of a liquidation of the Hedrin JV, Nordic’s distribution in liquidation must equal the amount Nordic invested in the Hedrin JV ($5.5 million) plus 10% per year, less the cumulative distributions received by Nordic from the Hedrin JV before any distribution is made to us.  If the Hedrin JV’s assets in liquidation exceed the Nordic liquidation preference amount, then any excess shall first be distributed to us until our distribution and the Nordic liquidation preference amount are in the same ratio as our respective equity interests in the Hedrin JV and then the remainder, if any, is distributed to Nordic and us in the same ratio as our respective equity interests.  Further, in no event shall Nordic’s distribution in liquidation be greater than assets available for distribution in liquidation.

 

Pursuant to the terms of the joint venture agreement, Nordic has the right to nominate one person for election or appointment to our board of directors.  The Hedrin JV's board of directors consists of four members, two members appointed by us and two members appointed by Nordic.  Nordic has the right to appoint one of the directors as chairman of the board.  The chairman has certain tie breaking powers.

Pursuant to the joint venture agreement, Nordic has the right to put all or a portion of the interest Nordic received in exchange for the first $5 million Nordic invested in the Hedrin JV in exchange for such number of shares of our common stock equal to the amount of Nordic’s investment in the Hedrin JV divided by $0.07, as adjusted for the 2010 Equity Financing, and as further adjusted from time to time for stock splits and other specified events, multiplied by a conversion factor, which is (i) 1.00 for so long as Nordic's distributions from the Hedrin JV are less than the amount of its investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin JV are less than two times the amount of its investment but greater than or equal to the amount of its investment amount, (iii) 1.50 for so long as Nordic's distributions from the Hedrin JV are less than three times the amount of its investment but greater than or equal to two times the amount of its investment amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are less than four times the amount of its investment but greater than or equal to three times the amount of its investment amount and (v) 3.00 for so long as Nordic’s distributions from Hedrin JV are greater than or equal to four times the amount of its investment.  The put right expires upon the earlier to occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's distributions from the Hedrin JV exceed five times the amount Nordic has invested in the Hedrin JV (or 10 days after such date if we have provided Nordic notice thereof).

 

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Pursuant to the joint venture agreement, we have the right to call all or a portion of Nordic's equity interest in the Hedrin JV in exchange for such number of shares of our common stock equal to the portion of Nordic's investment in the Hedrin JV that we call by the dollar amount of Nordic's investment as of such date in the Hedrin JV, divided by $0.07, as adjusted for the sale of  the Secured 12% Notes in the fourth quarter of 2008, and as further adjusted from time to time for stock splits and other specified events.  The call right is only exercisable by us if the price of our common stock has closed at or above $1.40 per share for 30 consecutive trading days.  During the first 30 consecutive trading days in which our common stock closes at or above $1.40 per share, we may exercise up to 25% of the call right.  During the second 30 consecutive trading days in which our common stock closes at or above $1.40 per share, we may exercise up to 50% of the call right on a cumulative basis.  During the third consecutive 30 trading days in which our common stock closes at or above $1.40 per share, we may exercise up to 75% of the call right on a cumulative basis.  During the fourth consecutive 30 days in which our common stock closes at or above $1.40 per share, we may exercise up to 100% of the call right on a cumulative basis.  Nordic may refuse the call, either by paying $1.5 million multiplied by the percentage of Nordic's investment being called or forfeiting an equivalent portion of the put right, calculated on a pro rata basis for the percentage of the Nordic equity interest called by us.   The call right expires on February 25, 2013.  For purposes of Nordic’s right to put, and our right to call, all or a portion of Nordic’s equity interest in the Hedrin JV, the amount of Nordic’s investment is currently $5,000,000.

In connection with our joint venture agreement, on February 25, 2008, Nordic paid us a non-refundable fee of $150,000 in exchange for the right to receive a warrant to purchase up to 14,285,714 shares of our common stock at $0.07 per share, as adjusted for the 2010 Equity Financing, and as further adjusted from time to time for stock splits and other specified events.

In connection with the joint venture agreement, we and Nordic entered into a registration rights agreement, on February 25, 2008, as modified pursuant to a letter agreement, dated September 17, 2008, pursuant to which we agreed to file with the Securities and Exchange Commission, or the SEC, by no later than 10 calendar days following the date on which our Annual Report on Form 10-K for the year ended December 31, 2007 is required to be filed with the SEC, which was subsequently waived by Nordic until May 1, 2008, an initial registration statement registering the resale by Nordic of any shares of our common stock issuable to Nordic through the exercise of the warrant or the put right.  We filed an initial registration statement on May 1, 2008, which was declared effective on October 15, 2008.

We also have agreed to file with the SEC any additional registration statements which may be required no later than 45 days after the date we first know such additional registration statement is required; provided, however, that (i) in the case of the classification by the FDA of Hedrin as a Class II or Class III medical device described above and the payment in full by Nordic of the related final milestone payment of $1.25 million, the registration statement with respect to the additional shares of our common stock relating to such additional investment must be filed within 45 days after achievement of such classification; and (ii) in the event we provide Nordic with notice of exercise of our right to call all or a portion of Nordic's equity interest in the Hedrin JV, a registration statement with respect to the shares of our common stock payable to Nordic in connection with such call right (after giving effect to any reduction in the number of such shares resulting from Nordic's refusal of all or a portion of such call in accordance with the terms of our joint venture agreement) must be filed within 16 days after delivery of such notice to Nordic.  If we fail to file a registration statement on time or if a registration statement is not declared effective by the SEC within 105 days of the required filing date, or otherwise fail to diligently pursue registration with the SEC in accordance with the terms of the registration rights agreement, we will be required to pay as partial liquidated damages and not as a penalty, to Nordic or its assigns, an amount equal to 0.5% of the amount invested in the Hedrin JV by Nordic pursuant to the joint venture agreement per month until the registration rights agreement is declared effective by the SEC; provided, however, that in no event shall the aggregate amount payable by us exceed 9% of the amount invested in the Hedrin JV by Nordic under the joint venture agreement.

 

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The Company was required to file an additional registration statement with 45 days of Nordic’s investment of an additional $1.25 million in the Hedrin JV in February 2009.  The Company did not meet this requirement as it had our registration statements pending.  The Company has requested a waiver until May 31, 2009 of Nordic’s registration rights in order to meet this obligation.  Nordic has verbally agreed to the waiver.

As per the Limited Partnership Agreement between the Company and Nordic (the “LPA”) in the event that a limited partner in the Hedrin JV (a “Limited Partner”) determines, in its reasonable goods faith discretion, that the Hedrin JV requires additional capital for the proper conduct of its business that Limited Partner shall provide each Limited Partner with a written request for contribution of such Limited Partner’s proportionate share, in accordance to the then respective equity ownership in the Hedrin JV, of such requested additional capital amount.

As per the terms of the LPA, if a Limited Partner declines to so contribute, elects to contribute but thereafter fails to do so timely, or elects to contribute and timely does contribute some, but not all of, its proportionate share of the requested additional capital amount, the other Limited Partner shall have the option to contribute the remaining balance of such requested additional capital amount.

As per the terms of the LPA, the General Partner shall determine the fair market value of the shares for purposes of determining how to allocate the number of shares of the Hedrin JV to be issued in consideration for the contribution of capital.  If the General Partner is unable to determine the fair market value of the shares, the fair market value for the shares shall be determined in good faith by the contributing Limited Partner if such amount is equal to or greater than the most recent valuation of such Hedrin JV shares.

On December 31, 2009, Nordic Biotech Venture Fund II (“Nordic”) delivered a written notice to the Company for a $1,000,000 capital increase to the Hedrin JV.  In January 2010, Nordic made its capital contribution to the Hedrin JV of $500,000.  The Company did not have sufficient funds to make such a capital contribution within the required time prescribed in the LPA.

The General Partner was unable to determine the fair market value of the shares.  The contributing Limited Partner, Nordic, determined in good faith that the fair market value of the shares is equal to the most recent valuation.  The most recent valuation was the February 2009 investment of $1,500,000 into the Hedrin JV by Nordic at $5,000 per share.  As a result of Nordic’s investing an additional $500,000 in the Hedrin JV, the ownership percentages of the Hedrin JV have changed from 50% to Nordic and 50% for the Company to 52.38% to Nordic and 47.62% for the Company.  In the event that Nordic exercises its option to invest the remaining $500,000 of the $1,000,000 capital increase then the ownership percentage shall change to 54.55% for Nordic and 45.45% for the Company.

Disagreement with Nordic

In April 2010 Nordic filed a Schedule 13D/A (the “ Amended 13D ”) with the SEC. We are not in agreement with the Amended 13D and have written a letter to Nordic explaining its disagreements.  The Amended 13D shows an aggregate number of shares of the Company’s common stock beneficially owned by Nordic of 216,666,666, or 65.5%.  We believe the correct beneficial ownership is 85,714,286 shares, or 42.9%.  The Amended 13D/A states that Nordic does not believe the Company’s determination of the anti-dilution shares accruing to Nordic as a result of the 2010 Equity Financing was neither reasonable nor made in good faith.  As we have previously stated we believe our determination was both reasonable and made in good faith.  The Amended 13D/A further states that Nordic acquired the right to purchase an additional 5,555,556 shares of the Company’s common stock upon exercise of the Nordic Put as a result of Nordic’s making an additional investment in the Hedrin JV of $500,000 in January 2010.  We are not in agreement with this claim, there is no adjustment to Nordic’s Put as a result of Nordic making additional capital contributions to the Hedrin JV.  In the letter to Nordic the Company also points out that Nordic’s valuation suggestions for the warrants issued in the 2010 Equity Financing ignore the concept of relative value inherent in the Hedrin JV Agreement.

 

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2010 Equity Financing

On March and April 2010, we raised aggregate gross proceeds of approximately $2.6 million pursuant to a private placement of our securities (the “2010 Equity Financing”).  We sold an aggregate of 104.3 Units  for a purchase price of $25,000 per Unit.  We issued to each Investor units (the "Units") consisting of  357,143 shares of common stock, $0.001 par value per share of the Company and 535,714 warrants, each of which will entitle the holder to purchase one additional share of Common Stock for a period of five years at an exercise price of $0.08 per share.   In addition in April 2010, the holder of the 12% Convertible Note with a stated value of $400,000 and $22,000 of accrued interest, exercised its option to convert its Debenture (including all accrued interest thereon) into 16.88 Units.  The conversion price was equal to the per Unit purchase price paid by the Investors in the private placement.

Convertible 12% Note Payable

 In October 2009, we sold a 12% Original Issue Discount Senior Subordinated Convertible Debenture with a stated value of $400,000 and a warrant to purchase 2,222,222 shares of the Company’s common stock, par value $.001 per share  for a purchase price of $200,000.  The Convertible 12% Note is convertible into shares of Common Stock at an initial conversion price of $0.09 per share, subject to adjustment, or, in the event the Company issues new securities in connection with a financing, the Convertible 12% Note may be converted into such new securities at a conversion price equal to the purchase price paid by the purchasers of such new securities.  The Convertible 12% Note was converted into the 2010 Equity Financing in April 2010 as described above.

Secured 10% Notes Payable

On September 11, 2008, we issued secured 10% promissory notes to certain of our directors and officers and an employee for aggregate principal amount of $70,000.  Principal and interest on the notes are payable in cash on March 10, 2009 unless paid earlier by the Company.  In connection with the issuance of the notes, the Company issued to the noteholders 5-year warrants to purchase an aggregate of 140,000 shares of our common stock at an exercise price of $0.20 per share.  We granted to the noteholders a continuing security interest in certain specific refunds, deposits and repayments due to us and expected to be repaid to us in the next several months.  The secured 10% notes were repaid in February 2009 along with interest thereon.

Secured 12% Notes Payable

 

On February 3, 2009, we completed a private placement of 345 units, with each unit consisting of Secured 12% Notes in the principal amount of $5,000 and a warrant to purchase up to 166,667 shares of our common stock at an exercise price of $.09 per share which expires on December 31, 2013, for aggregate gross proceeds of $1,725,000.  The private placement was completed in three closings which occurred on November 19, 2008 with respect to 207 units, December 23, 2008 with respect to 56 units and February 3, 2009 with respect to 82 units.

To secure our obligations under the notes, we entered into a security agreement and a default agreement with the investors. The security agreement provides that the notes will be secured by a pledge of our assets other than (i) our interest in the Hedrin joint venture, including, without limitation, our interest in H Pharmaceuticals K/S and H Pharmaceuticals General Partner ApS, (ii) our rent deposit for our former office space, (iii) our refund of a prepayment and (iv) our tax refund for the 2007 fiscal year from the State of New York and City of New York.  In addition, to provide additional security for our obligations under the notes, we entered into a default agreement, which provides that upon an event of default under the notes, we shall, at the request of the holders of the notes, use our reasonable commercial efforts to either (i) sell a part or all of our interests in the Hedrin JV or (ii) transfer all or part of our interest in the Hedrin JV to the holders of the notes, as necessary, in order to fulfill our obligations under the notes, to the extent required and to the extent permitted by the applicable Hedrin JV agreements.

 

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In connection with the private placement, we, the placement agent and the investors entered into a registration rights agreement.  Pursuant to the registration rights agreement, we agreed to file a registration statement to register the resale of the shares of our common stock issuable upon exercise of the warrants issued to the investors in the private placement, within 20 days of the final closing date and to cause the registration statement to be declared effective within 90 days (or 120 days upon full review by the SEC).   During the three month period ended March 31, 2009,  we filed the registration statement, received a comment letter from the SEC, responded to the SEC comment letter and re-filed the registration statement.  The registration statement was declared effective by the SEC on April 17, 2009.

Commitments

Development Commitments

At present the Company has no development commitments.

Research and Development Projects

AST-726

Our wholly owned subsidiary, Ariston, is developing a nasally-delivered Vitamin B12 remediation treatment which it calls AST-726.  AST-726 has demonstrated pharmacokinetic equivalence to a marketed intramuscular injection product for Vitamin B12 remediation.  Ariston believes that AST-726 may enable both a single, once-monthly treatment for maintenance of normal Vitamin B12 levels in deficient patients, and more frequent administration to restore normal levels in newly diagnosed B12 deficiency.  Further, Ariston believes that AST-726 could offer a convenient, painless, safe and cost-effective treatment for Vitamin B12 deficiency, without the need for intramuscular injections.

Ariston has positioned AST-726 to currently require only a single, relatively small Phase III clinical trial prior to submission of a 505(b)(2) new drug application (“NDA”) to the FDA.

Ariston has developed a CMC/manufacturing process for AST-726 that Ariston believes provides a commercially viable stability profile.  Ariston has two issued patents in the United States with respect to AST-726, one of which relates to its application in Vitamin B12 remediation.

More than 9 million people in the US are deficient in Vitamin B12, indicating substantial market potential for a facile, convenient, safe and effective treatment that can replace the need for painful and frequent intramuscular injections or other less than fully effective delivery forms. Ariston believes that substantial market opportunity also exists internationally.

Vitamin B12 Deficiency-Background of the Disease

Untreated Vitamin B12 deficiency can result in serious clinical problems including hematological disorders, such as life-threatening anemias, and a range of central and peripheral neurological abnormalities such as fatigue, confusion, cognition impairment, dementia, depression, peripheral neuropathies and gait disturbances.  Neuronal damage may involve peripheral nerves, the spinal cord and the brain and if the condition is left untreated may become permanent.  Furthermore, clinically asymptomatic patients with low normal or below normal Vitamin B12 levels may have changes in blood chemistries, including elevated levels of methylmalonic acid or homocysteine, known risk factors for other medical conditions associated with an increased risk of circulatory problems, blood clots and cardiovascular disease.

The primary diagnosis of Vitamin B12 deficiency is made when measurement of its blood concentration falls below the expected normal range of 200 to 900 picograms/ml. Vitamin B12 deficiency is most often caused by pathological conditions that limit the body’s ability to absorb the vitamin.  Such disorders include pernicious anemia, atrophic gastritis, problems caused by gastric surgical procedures to treat stomach cancer and obesity, Crohn’s disease and simple age-related changes.  Some studies show the inability to properly absorb Vitamin B12 as a side effect from chronic use of certain widely prescribed antacid medications such as Prilosec ® and diabetes treatments such as Glucophage ®.

Approximately 15% of the elderly and up to 40% of nursing home residents in the U.S. have Vitamin B12 deficiency. A study of over 11,000 U.S. civilians ages four and older found a 3% prevalence of Vitamin B12 deficiency in the general population using the 200 picograms/ml deficiency standard, indicating that approximately 9 million people in the U.S. are in need of B12 replacement therapy. Some experts advocate a higher deficiency standard of 300-350 picograms/ml on the basis that levels below this coincide with elevated methylmalonic acid and homocysteine, risk factors for cardiovascular disease as found in the Framingham Heart Study. On this basis the prevalence of Vitamin B12 deficiency increases substantially.

 

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Current Treatments for Vitamin B12 Deficiency

Once Vitamin B12 deficiency is diagnosed by a simple blood test, the goal of treatment is generally to:

o       restore circulating blood levels to normal as rapidly as possible;

o       replenish and normalize the substantial stores of the vitamin in the body; and

o       institute a lifelong therapeutic regimen that will maintain normal levels of the vitamin.

Ariston believes that parenteral (intramuscular injection) treatment is often considered the treatment of choice for Vitamin B12 deficiency.  Cyanocobalamin is predominantly used for this purpose in the United States, but hydroxocobalamin, the active ingredient in AST-726, is also available for pediatrics and for adults for whom injection of cyanocobalamin is poorly tolerated.  Hydroxocobalamin injection is the predominant treatment for Vitamin B12 deficiency in Europe.

In the United States, intramuscular injections are generally given by a physician or nurse, necessitating an office/medical center visit by the patient or a visiting nurse home call for each treatment. Following a diagnosis of B12 deficiency, injections are required quite frequently in order to restore normal vitamin levels. Once normalization is achieved, the frequency can be reduced to once or twice per month. While the treatment is usually highly effective, the inconvenience and cost of frequent office visits and the pain and side-effects associated with intramuscular injections are problematic for many patients.

Intranasal treatment with Vitamin B12 deficiency seeks to alleviate these problems, but the two intranasal products currently available in the United States have to be administered on a daily or weekly basis and are not usually recommended for the treatment of newly diagnosed patients.  Both products are based on cyanocobalamin.

Oral or sublingual administration of high doses of Vitamin B12 can restore deficient patients to normal in certain cases.  Such high dose supplements are generally available in pharmacies and nutrition/health food stores.  Adequate results can almost certainly be obtained when nutritional insufficiency (e.g., strict vegan diet) is the primary cause of the problem. However, the normal gastrointestinal tract has a very limited capability to absorb Vitamin B12 and if this is compromised, as is the case in many deficient patients, oral or sublingual supplementation may not be ideal for rapidly restoring circulating levels and storage depots of the vitamin to normal. In such cases of pathological Vitamin B12 deficiency, intramuscular injection still often remains the current treatment of choice.

An unapproved Vitamin B12 patch is available in the United States, but Ariston believes that its effectiveness in moderate to severe Vitamin B12 deficient patients is substantially untested.

Potential Advantages of Ariston’s AST-726 Treatment

Ariston believes that Ariston’s AST-726 treatment has the potential to directly substitute for and replace the need for injection treatment by applying the current injection frequency paradigms for both newly diagnosed and normalized Vitamin B12 deficient patients.  AST-726 is proposed to be self-administered at home by the patient, without costly, time-consuming and inconvenient visits to a doctor’s office or medical facility needed for each of the many intramuscular injections required for life.  Because it is delivered through a nasal spray, additional advantages include freedom from injection pain and reduced anxiety in individuals, including children and the elderly, who may have fear of injections.  Ariston believes that the delivery profile of AST-726 is comparable to that of the marketed intramuscular injection, and that therefore newly diagnosed patients will be able to self-administer the nasal spray on a daily basis or several times a week to restore their Vitamin B12 status to normal and will then be self-maintained on a single monthly nasal spray treatment.

Additional Clinical Trial Is Needed

AST-726, a commercial nasal spray formulation of hydroxocobalamin, has satisfactorily completed preclinical toxicology, and an Investigational New Drug (“IND”) Application has been filed with the FDA.  This product candidate is being developed utilizing the 505(b)(2) regulatory pathway.  AST-726 has also successfully completed a safety and pharmacokinetic study in healthy volunteers and an end of Phase II meeting with FDA has been completed.  We are planning a Phase III Vitamin B12 replacement study in the United States.  The study is designed to enroll approximately 40 Vitamin B12 deficient patients currently treated with injection therapy.  Patients will first be evaluated on injection therapy and then will receive AST-726 by nasal spray on a monthly basis for 12 weeks.  The primary purpose of this study is to determine that levels of Vitamin B12 in the patients’ bloodstream remain within the normal range following monthly administration of AST-726.  We anticipate that the data from this study and additional manufacturing information will support the planned 505(b)(2) new drug application (“NDA”) filing for AST-726.

 

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AST-915

Ariston is also developing AST-915, an orally delivered treatment for essential tremor.  We acquired global rights to AST-915 as part of the Ariston acquisition.  This product candidate is being studied under a Cooperative Research and Development Agreement (CRADA) with the National Institutes of Health (NIH) and a Phase 1 clinical study is currently underway in essential tremor patients.  AST-915 was formerly referred to as “AST-914 metabolite”.

Essential Tremor

Essential tremor is a neurological disorder that is characterized by involuntary shaking of the hands, arms, head, voice, and upper body. The most disabling tremors occur during voluntary movement, affecting common skills such as writing, eating and drinking.  Essential tremor is often misdiagnosed as Parkinson’s disease, yet according to the National Institutes of Neurological Disorders and Stroke, approximately 8 times as many people have essential tremor as have Parkinson’s.  Essential tremor is not confined to the elderly.  Children, newborns, and middle-aged people can also have the condition.

Market opportunity

Essential tremor is the most common involuntary movement disorder, with increasing incidence as people age.  According to the National Institute of Health (NIH), essential tremor affects 14% of people 65 years and older, which equates to approximately 5.4 million Americans.  There is no cure for essential tremor and the currently available drug therapies do not work in certain patients, produce at best a 50% response in others and have significant side effects.  We believe AST-915 may provide a new treatment option for this serious and prevalent disorder. We believe that substantial market opportunity also exists internationally.

Hedrin

 

In collaboration with Nordic and through the Hedrin JV we are developing Hedrin for the treatment of pediculosis (head lice).  To date, Hedrin has been clinically studied in 326 subjects and is currently marketed as a device in Western Europe and as a pharmaceutical in the United Kingdom (U.K.).

In a randomized, controlled, equivalence clinical study conducted in Europe by T&R, Hedrin was administered to 253 adult and child subjects with head louse infestation.  The study results, published in the British Medical Journal in June 2005, demonstrated Hedrin’s equivalence when compared to the insecticide treatment, phenothrin, the most widely used pediculicide in the U.K.  In addition, according to the same study, the Hedrin-treated subjects experienced significantly less irritation (2%) than those treated with phenothrin (9%).

An additional clinical study published in the November 2007 issue of PLoS One, an international, peer-reviewed journal published by the Public Library of Science (PLoS), demonstrated Hedrin’s superior efficacy compared to a U.K. formulation of malathion, a widely used insecticide treatment in both Europe and North America.  In this randomized, controlled, assessor blinded, parallel group clinical trial, 73 adult and child subjects with head lice infestations were treated with Hedrin or malathion liquid.  Using intent-to-treat analysis, Hedrin achieved a statistically significant cure rate of 70% compared to 33% with malathion liquid.  Using the per-protocol analysis Hedrin achieved a highly statistically significant cure rate of 77% compared to 35% with malathion.  In Europe it has been widely documented that head lice had become resistant to European formulations of malathion, and we believe this resistance had influenced these study results.  To date, there have been no reports of resistance to U.S. formulations of malathion.  Additionally, Hedrin treated subjects experienced no irritant reactions, and Hedrin showed clinical equivalence to malathion in its ability to inhibit egg hatching.  Overall, investigators and study subjects rated Hedrin as less odorous, easier to apply, and easier to wash out, and 97% of Hedrin treated subjects stated they were significantly more inclined to use the product again versus 31% of those using malathion.

Two new, unpublished Hedrin studies were completed by T&R in 2008.  In the first, Hedrin achieved a 100% kill rate in vitro, including in malathion resistant head lice.  In the other, a clinical field study conducted in Manisa province, a rural area of Western Turkey, Hedrin was administered to 36 adult and child subjects with confirmed head lice infestations.  Using per protocol analysis, Hedrin achieved a 97% cure rate.  Using intent-to-treat analysis, Hedrin achieved a 92% cure rate since 2 subjects were eliminated due to protocol violations.  No subjects reported any adverse events.

 

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