UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008

OR

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission file number 001-32639

Manhattan Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
36-3898269
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

810 Seventh Avenue, 4th Floor, New York, New York 10019
(Address of principal executive offices)

(212) 582-3950
(Issuer’s telephone number)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer   o  Accelerated filer   o  Non-accelerated filer   o Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 1, 2008 there were 70,624,232 shares of the issuer’s common stock, $.001 par value, outstanding.



INDEX 
 
   
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
Unaudited Condensed Consolidated Balance Sheets
 4
 
Unaudited Condensed Consolidated Statements of Operations
 5
 
Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)
 6
 
Unaudited Condensed Consolidated Statements of Cash Flows
 8
 
Notes to Unaudited Condensed Consolidated Financial Statements
 9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
37
Item 4.
Controls and Procedures
37
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 4.
Submission of Matters to a Vote of Security Holders
39
Item 6.
Exhibits
39
 
Signatures
40
 
2


Forward-Looking Statements
 
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities and Exchange Act of 1934. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “may,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. These statements are therefore subject to risks and uncertainties, known and unknown, which could cause actual results and developments to differ materially from those expressed or implied in such statements. Such risks and uncertainties relate to, among other factors:
 
·
the development of our drug candidates;
·
the regulatory approval of our drug candidates;
·
our use of clinical research centers and other contractors;
·
our ability to find collaborative partners for research, development and commercialization of potential products;
·
acceptance of our products by doctors, patients or payers;
·
our ability to market any of our products;
·
our history of operating losses;
·
our ability to compete against other companies and research institutions;
·
our ability to secure adequate protection for our intellectual property;
·
our ability to attract and retain key personnel;
·
availability of reimbursement for our product candidates;
·
the effect of potential strategic transactions on our business;
·
our ability to obtain adequate financing; and
·
the volatility of our stock price.
 
Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3


Part I – Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets 

 
 
June 30,
2008
 
December 31,
2007
 
 
 
 (Unaudited)
 
 (See Note 1)
 
Assets
         
Current assets:
 
 
 
 
 
Cash and cash equivalents
 
$
576,354
 
$
649,686
 
Prepaid expenses and other current assets
   
135,540
   
215,852
 
Total current assets 
   
711,894
   
865,538
 
 
         
Investment in Hedrin JV
   
142,408
   
-
 
Property and equipment, net
   
34,912
   
44,533
 
Other assets
   
84,126
   
70,506
 
Total assets 
 
$
973,340
 
$
980,577
 
 
         
 Liabilities and Stockholders’ Deficiency
         
 
         
Current liabilities:
         
Accounts payable
 
$
617,346
 
$
1,279,485
 
Accrued expenses
   
849,746
   
592,177
 
Total current liabilities 
   
1,467,092
   
1,871,662
 
               
Exchange obligation
   
2,953,230
   
-
 
Total liabilities 
   
4,420,322
   
1,871,662
 
               
Commitments and contingencies
         
 
         
Stockholders’ deficiency:
         
Preferred stock, $.001 par value. Authorized 1,500,000 shares; no shares issued and outstanding at June 30, 2008 and December 31, 2007
         
Common stock, $.001 par value. Authorized 300,000,000 shares; 70,624,232 shares issued and outstanding at June 30, 2008 and December 31, 2007
   
70,624
   
70,624
 
Additional paid-in capital
   
54,483,025
   
54,037,361
 
Deficit accumulated during the development stage
   
(58,000,631
)
 
(54,999,070
)
Total stockholders’ deficiency  
   
(3,446,982
)
 
(891,085
)
 
         
Total liabilities and stockholders' deficiency 
 
$
973,340
 
$
980,577
 
 
See accompanying notes to condensed consolidated financial statements.

4



MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three months ended June 30,
 
Six months ended June 30,
 
Cumulative
period from
August 6, 2001
(inception) to
June 30
 
   
2008
 
2007
 
2008
 
2007
 
2008
 
Costs and expenses:
                     
Research and development
 
$
565,728
 
$
3,871,634
 
$
1,365,799
 
$
5,551,082
 
$
27,854,842
 
General and administrative
   
901,538
   
1,052,374
   
1,715,598
   
1,967,098
   
15,567,961
 
In-process research and development charge
   
   
   
   
   
11,887,807
 
Impairment of intangible assets
   
   
   
   
   
1,248,230
 
Loss on disposition of intangible assets
   
   
   
   
   
1,213,878
 
Total operating expenses
   
1,467,266
   
4,924,008
   
3,081,397
   
7,518,180
   
57,772,718
 
                                 
Operating loss
   
(1,467,266
)
 
(4,924,008
)
 
(3,081,397
)
 
(7,518,180
)
 
(57,772,718
)
                                 
Other (income) expense:
                               
Equity in loss of Hedrin JV
   
87,718
   
   
107,593
   
   
107,593
 
Interest and other income
   
(132,772
)
 
(29,608
)
 
(187,429
)
 
(59,998
)
 
(1,009,327
)
Interest expense
   
   
   
   
475
   
26,034
 
Realized gain on sale of marketable equity securities
   
   
   
   
   
(76,032
)
Total other income
   
(45,054
)
 
(29,608
)
 
(79,836
)
 
(59,523
)
 
(951,731
)
                         
Net loss
   
(1,422,212
)
 
(4,894,400
)
 
(3,001,561
)
 
(7,458,657
)
 
(56,820,987
)
                                 
Preferred stock dividends (including imputed amounts)
   
   
   
   
   
(1,179,644
)
                                 
Net loss applicable to common shares
 
$
(1,422,212
)
$
(4,894,400
)
$
(3,001,561
)
$
(7,458,657
)  
(58,000,631
)
                                 
Net loss per common share:
                               
Basic and diluted
 
$
(0.02
)
$
(0.07
)
$
(0.04
)
$
(0.11
)
     
                                 
Weighted average shares of common stock outstanding:
                               
Basic and diluted
   
70,624,232
   
70,463,543
   
70,624,232
   
65,377,865
       

See accompanying notes to unaudited condensed consolidated financial statements.
 
5

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)
(Unaudited)

   
Series A convertible preferred stock
 
Series A convertible preferred stock
 
Common stock
 
Common stock
 
Additional
paid-in capital
 
Subscription receivable
 
Deficit accumulated during development stage
 
Dividends payable in
Series A preferred stock
 
Accumulated other comprehensive income (loss)
 
Unearned consulting services
 
Total stockholders’ equity (deficiency)
 
 
 
 Shares
 
Amount
 
Shares
 
Amount
 
         Amount         
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Stock issued at $0.0004 per share for subscription receivable
   
 
$
   
10,167,741
 
$
10,168
 
$
(6,168
)
$
(4,000
)
$
 
$
 
$
 
$
 
$
 
Net loss
   
   
   
   
   
   
   
(56,796
)
 
   
   
   
(56,796
)
Balance at December 31, 2001
   
   
   
10,167,741
   
10,168
   
(6,168
)
 
(4,000
)
 
(56,796
)
 
   
   
   
(56,796
)
 
   
   
   
   
   
   
   
   
   
   
   
 
Proceeds from subscription receivable
   
   
   
   
   
   
4,000
   
   
   
   
   
4,000
 
Stock issued at $0.0004 per share for license rights
   
   
   
2,541,935
   
2,542
   
(1,542
)
 
   
   
   
   
   
1,000
 
Stock options issued for consulting services
   
   
   
   
   
60,589
   
   
   
   
   
(60,589
)
 
 
Amortization of unearned consulting services
   
   
   
   
   
   
   
   
   
   
22,721
   
22,721
 
Common stock issued at $0.63 per share, net of expenses
   
   
   
3,043,332
   
3,043
   
1,701,275
   
   
   
   
   
   
1,704,318
 
Net loss
   
   
   
   
   
   
   
(1,037,320
)
 
   
   
   
(1,037,320
)
Balance at December 31, 2002
   
   
   
15,753,008
   
15,753
   
1,754,154
   
   
(1,094,116
)
 
   
   
(37,868
)
 
637,923
 
 
   
   
   
   
   
   
   
   
   
   
   
 
Common stock issued at $0.63 per share, net of expenses
   
   
   
1,321,806
   
1,322
   
742,369
   
   
   
   
   
   
743,691
 
Effect of reverse acquisition
   
   
   
6,287,582
   
6,287
   
2,329,954
   
   
   
   
   
   
2,336,241
 
Amortization of unearned consulting costs
   
   
   
   
   
   
   
   
   
   
37,868
   
37,868
 
Unrealized loss on short-term investments
   
   
   
   
   
   
   
   
   
(7,760
)
 
   
(7,760
)
Payment for fractional shares for stock combination
   
   
   
   
   
(300
)
 
   
   
   
   
   
(300
)
Preferred stock issued at $10 per share, net of expenses
   
1,000,000
   
1,000
   
   
   
9,045,176
   
   
   
   
   
   
9,046,176
 
Imputed preferred stock dividend
   
   
   
   
   
418,182
   
   
(418,182
)
 
   
   
   
 
Net loss
   
   
   
   
   
   
   
(5,960,907
)
 
   
   
   
(5,960,907
)
Balance at December 31, 2003
   
1,000,000
   
1,000
   
23,362,396
   
23,362
   
14,289,535
   
   
(7,473,205
)
 
   
(7,760
)
 
   
6,832,932
 
 
   
   
   
   
   
   
   
   
   
   
   
 
Exercise of stock options
   
   
   
27,600
   
27
   
30,073
   
   
   
   
   
   
30,100
 
Common stock issued at $1.10, net of expenses
   
   
   
3,368,952
   
3,369
   
3,358,349
   
   
   
   
   
   
3,361,718
 
Preferred stock dividend accrued
   
   
   
   
   
   
   
(585,799
)
 
585,799
   
   
   
 
Preferred stock dividends paid by issuance of shares
   
24,901
   
25
   
   
   
281,073
   
   
   
(282,388
)
 
   
   
(1,290
)
Conversion of preferred stock to common stock at $1.10 per share
   
(170,528
)
 
(171
)
 
1,550,239
   
1,551
   
(1,380
)
 
   
   
   
   
   
 
Warrants issued for consulting services
   
   
   
   
   
125,558
   
   
   
   
   
(120,968
)
 
4,590
 
Amortization of unearned consulting costs
   
   
   
   
   
   
   
   
   
   
100,800
   
100,800
 
Unrealized gain on short-term investments and reversal of unrealized loss on short-term investments
   
   
   
   
   
   
   
   
   
20,997
   
   
20,997
 
Net loss
   
   
   
   
   
   
   
(5,896,031
)
 
   
   
   
(5,896,031
)
Balance at December 31, 2004
   
854,373
   
854
   
28,309,187
   
28,309
   
18,083,208
   
   
(13,955,035
)
 
303,411
   
13,237
   
(20,168
)
 
4,453,816
 
 
6

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficiency)
(Unaudited)

   
 Series A convertible preferred stock
 
 Series A convertible preferred stock
 
 Common stock
 
 Common stock
 
 Additional paid-in capital
 
 Subscription receivable
 
 Deficit accumulated during development stage
 
 Dividends payable in Series A preferred stock
 
 Accumulated other comprehensive income (loss)
 
 Unearned consulting services
 
 Total stockholders’ equity (deficiency)
 
   
 Shares
 
 Amount
 
 Shares
 
 Amount
 
 Amount
 
 Amount
 
 Amount
 
 Amount
 
 Amount
 
 Amount
 
 Amount
 
Common stock issued at $1.11 and $1.15, net of expenses
   
   
   
11,917,680
   
11,918
   
12,238,291
   
   
   
   
   
   
12,250,209
 
Common stock issued to vendor at $1.11 per share in satisfaction of accounts payable
   
   
   
675,675
   
676
   
749,324
   
   
   
   
   
   
750,000
 
Exercise of stock options
   
   
   
32,400
   
33
   
32,367
   
   
   
   
   
   
32,400
 
Exercise of warrants
   
   
   
279,845
   
279
   
68,212
   
   
   
   
   
   
68,491
 
Preferred stock dividend accrued
   
   
   
   
   
   
   
(175,663
)
 
175,663
   
   
   
 
Preferred stock dividends paid by issuance of shares
   
41,781
   
42
   
   
   
477,736
   
   
   
(479,074
)
 
   
   
(1,296
)
Conversion of preferred stock to common stock at $1.10 per share
   
(896,154
)
 
(896
)
 
8,146,858
   
8,147
   
(7,251
)
 
   
   
   
   
   
 
Share-based compensation
   
   
   
   
   
66,971
   
   
   
   
   
20,168
   
87,139
 
Reversal of unrealized gain on short-term investments
   
   
   
   
   
   
   
   
   
(12,250
)
 
   
(12,250
)
Stock issued in connection with acquisition of Tarpan Therapeutics, Inc.
   
   
   
10,731,052
   
10,731
   
11,042,253
   
   
   
   
   
   
11,052,984
 
Net loss
   
   
   
   
   
   
   
(19,140,997
)
 
   
   
   
(19,140,997
)
Balance at December 31, 2005
   
   
   
60,092,697
   
60,093
   
42,751,111
   
   
(33,271,695
)
 
   
987
   
   
9,540,496
 
                                                                     
Cashless exercise of warrants
   
   
   
27,341
   
27
   
(27
)
 
   
   
   
   
   
 
Share-based compensation
   
   
   
   
   
1,675,499
   
   
   
   
   
   
1,675,499
 
Unrealized loss on short-term investments
   
   
   
   
   
   
   
   
   
(987
)
 
   
(987
)
Costs associated with private placement
   
   
   
   
   
(15,257
)
 
   
   
   
   
   
(15,257
)
Net loss
   
   
   
   
   
   
   
(9,695,123
)
 
   
   
   
(9,695,123
)
Balance at December 31, 2006
   
   
   
60,120,038
   
60,120
 
$
44,411,326
   
   
(42,966,818
)
 
   
   
   
1,504,628
 
                                                                     
Common stock issued at $0.84 and $0.90 per shares, net of expenses
   
   
   
10,185,502
   
10,186
   
7,841,999
   
   
   
   
   
   
7,852,185
 
Common stock issued to directors at $0.72 per share in satisfaction of accounts payable
   
   
   
27,776
   
28
   
19,972
   
   
   
   
   
   
20,000
 
Common stock issued to in connection with in-licensing agreement at $0.90 per share
   
   
   
125,000
   
125
   
112,375
   
   
   
   
   
   
112,500
 
Common stock issued to in connection with in-licensing agreement at $0.80 per share
   
   
   
150,000
   
150
   
119,850
   
   
   
   
   
   
120,000
 
Exercise of warrants
   
   
   
10,327
   
15
   
7,219
   
   
   
   
   
   
7,234
 
Cashless exercise of warrants
   
   
   
5,589
   
   
(6
)
 
   
   
   
   
   
(6
)
Share-based compensation
   
   
   
   
   
1,440,956
   
   
   
   
   
   
1,440,956
 
Warrants issued for consulting
                           
83,670
                                 
83,670
 
Net loss
   
   
   
   
   
   
   
(12,032,252
)
 
   
   
   
(12,032,252
)
Balance at December 31, 2007
   
   
   
70,624,232
   
70,624
   
54,037,361
   
   
(54,999,070
)
 
   
   
   
(891,085
)
Sale of warrant
                           
150,000
                                 
150,000
 
Share-based compensation
   
   
   
   
   
295,664
   
   
   
   
   
   
295,664
 
Net loss
   
   
   
   
   
-
   
   
(3,001,561
)
 
   
   
   
(3,001,561
)
Balance at June 30, 2008
   
 
$
   
70,624,232
 
$
70,624
 
$
54,483,025
 
$
 
$
(58,000,631)
)
$
 
$
 
$
 
$
(3,446,982
)
 

See accompanying notes to condensed consolidated financial statements.
 
7

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  
           
Cumulative
 
           
period from
 
           
August 6, 2001
 
   
Six months ended June 30,
 
(inception) to
 
   
2008
 
2007
 
June 30, 2008
 
Cash flows from operating activities:
 
    
 
 
 
 
 
Net loss
 
$
(3,001,561
)
$
(7,458,657
)
$
(56,820,987
)
Adjustments to reconcile net loss to net cash used in operating activities:
             
Equity in loss of Hedrin JV
   
107,593
   
   
107,593
 
Share-based compensation
   
295,664
   
706,549
   
3,660,647
 
Shares issued in connection with in-licensing agreement
   
   
112,500
   
232,500
 
Warrants issued to consultant
   
   
   
83,670
 
Amortization of intangible assets
   
   
   
145,162
 
Gain on sale of marketable equity securities
   
         
(76,032
)
Depreciation
   
15,631
   
29,974
   
211,456
 
Non cash portion of in-process research and development charge
   
   
   
11,721,623
 
Loss on impairment and disposition of intangible assets
   
   
   
2,462,108
 
Other
   
2,962
   
   
8,552
 
Changes in operating assets and liabilities, net of acquisitions:
             
(Increase)/decrease in prepaid expenses and other current assets
   
80,311
   
(88,071
)
 
(77,296
)
Increase in other assets
   
   
-
   
(70,506
)
Increase /(decrease) in accounts payable
   
(662,139
)
 
(371,447
)
 
1,037,559
 
Increase in accrued expenses
   
257,569
   
978,377
   
309,425
 
Net cash used in operating activities
   
(2,903,970
)
 
(6,090,775
)
 
(37,064,526
)
Cash flows from investing activities:
             
Purchase of property and equipment
   
(8,972
)
 
(9,135
)
 
(239,607
)
Cash paid in connection with acquisitions
   
   
   
(26,031
)
Net cash provided from the purchase and sale of short-term investments, net
   
   
   
435,938
 
Proceeds from the sale of license
   
   
   
200,001
 
Investment in Hedrin JV’s general partner
   
(13,620
)
 
   
(13,620
)
Net cash (used in) provided by investing activities
   
(22,592
)
 
(9,135
)
 
356,681
 
Cash flows from financing activities:
             
Repayments of notes payable to stockholders
   
   
   
(884,902
)
Proceeds related to sale of common stock, net
   
   
7,854,153
   
25,896,262
 
Proceeds from sale of preferred stock, net
   
   
   
9,046,176
 
Proceeds from exercise of warrants and stock options
   
   
7,228
   
138,219
 
Proceeds from the Hedrin JV Agreement, net
   
2,703,230
   
   
2,703,230
 
Sale of warrant
   
150,000
   
   
150,000
 
Other, net
   
   
   
235,214
 
Net cash provided by financing activities
   
2,853,230
   
7,861,381
   
37,284,199
 
Net (decrease) increase in cash and cash equivalents
   
(73,332
)
 
1,761,471
   
576,354
 
Cash and cash equivalents at beginning of period
   
649,686
   
3,029,118
   
 
Cash and cash equivalents at end of period
 
$
576,354
 
$
4,790,589
 
$
576,354
 
 
             
Supplemental disclosure of cash flow information:
             
Interest paid
 
$
 
$
475
 
$
26,033
 
Supplemental disclosure of noncash investing and financing activities:
             
Common stock issued in satisfaction of accounts payable
 
$
 
$
20,000
 
$
750,000
 
Imputed preferred stock dividend
   
   
   
418,182
 
Preferred stock dividends accrued
   
   
   
761,462
 
Preferred stock dividends paid by issuance of shares
   
   
   
9,046,176
 
Conversion of preferred stock to common stock
   
   
   
759,134
 
Issuance of common stock for acquisitions
   
   
   
13,389,226
 
Issuance of common stock in connection with in-licensing agreement
   
   
112,500
   
232,500
 
Marketable equity securities received in connection with sale of license
   
   
   
359,907
 
Warrants issued to consultant
   
   
   
83,670
 
Net liabilities assumed over assets acquired in business combination
   
   
   
(675,416
)
Investment in Hedrin JV
   
250,000
   
   
250,000
 
Cashless exercise of warrants
   
   
6
   
33
 

See accompanying notes to condensed consolidated financial statements.
8

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Manhattan Pharmaceuticals, Inc. and its subsidiaries (“Manhattan” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2008 or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2007, which are included in the Company’s Annual Report on Form 10-K for such year. The condensed balance sheet as of December 31, 2007 has been derived from the audited financial statements included in the Form 10-K for that year.

As of December 31, 2006 all of the Company’s subsidiaries had either been dissolved or merged into Manhattan. As a result, the Company had no subsidiaries during the six month periods ended June 30, 2008 and 2007.

As of June 30, 2008, the Company has not generated any revenues from the development of its products and is therefore considered to be a development stage company.

Segment Reporting

The Company has determined that it operates in only one segment currently, which is biopharmaceutical research and development.

Income Taxes

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109”. The implementation of FIN 48 had no impact on the Company’s consolidated financial statements as the Company has no unrecognized tax benefits.  The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

Equity in Joint Venture

The Company accounts for its investment in joint venture (See Note 8) using the equity method of accounting. Under the equity method, the Company records its pro-rata share of joint venture income or losses and adjusts the basis of its investment accordingly.

9

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS No. 141, “Business Combinations” (“SFAS 141R”). The revision is intended to simplify existing guidance and converge rulemaking under U.S. generally accepted accounting principles with international accounting standards. SFAS 141R applies prospectively to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact of the provisions of the revision on its consolidated results of operations and financial condition.
 
In March 2008, the FASB issued SFAS No. 161 "Disclosures About Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity's derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective for the Company as of January 1, 2009. The Company does not believe that SFAS 161 will have any impact on its consolidated financial statements.

2. LIQUIDITY

The Company incurred a net loss of $3,001,561 and negative cash flows from operating activities of $2,903,970 for the six month period ended June 30, 2008. The net loss applicable to common shares from date of inception, August 6, 2001, to June 30, 2008 amounts to $58,000,631.

The Company received approximately $7.9 million net of expenses from a private placement of common stock and warrants in March 2007. This private placement is more fully described in Note 6.

The Company received approximately $2.0 million in February 2008 and approximately $1.0 million in June 2008 from a joint venture agreement. This joint venture agreement is more fully described in Note 8.

Management believes that the Company will continue to incur net losses through at least June 30, 2009 and for the foreseeable future thereafter. Based on the resources of the Company available at June 30, 2008 and the net proceeds received from the February 2008 joint venture agreement, management does not believe that the Company has sufficient capital to fund its operations into the fourth quarter of 2008. Management believes that the Company has an immediate need for capital in order to sustain its operations and will need additional equity or debt financing or will need to generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations through 2008. Furthermore, we will need additional financing thereafter to complete development and commercialization of our 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

10

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The Company’s continued operations will depend on its ability to raise additional funds through various potential sources such as equity and debt financing, collaborative agreements, strategic alliances and its ability to realize the full potential of its technology in development. Additional funds may not become available on acceptable terms, and there can be no assurance that any additional funding that the Company does obtain will be sufficient to meet the Company’s needs in the long-term.

3. COMPUTATION OF NET LOSS PER COMMON SHARE

Basic net loss per common share is calculated by dividing net loss applicable to common shares by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from the assumed exercise of stock options and stock warrants would have an antidilutive effect because the Company incurred a net loss during each period presented. The amounts of potentially dilutive securities excluded from the calculation of diluted net loss per share were 19,450,189 and 18,634,521 as of June 30, 2008 and 2007, respectively. These amounts do not include the shares issuable in connection with the Hedrin JV (see Note 8); the 17,857,143 shares of common stock issuable upon exercise of the put or call rights; the up to 17,857,143 additional shares which may become issuable upon exercise of a conditionally issuable put or call rights and the 7,142,857 shares of common stock issuable upon exercise of a conditionally issuable warrant.

4. SHARE-BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” (“Statement 123(R)”) for employee options using the modified prospective transition method. Statement 123(R) revised Statement 123 “Accounting for Stock-based Compensation” to eliminate the option to use the intrinsic value method and required the Company to expense the fair value of all employee options over the vesting period. Under the modified prospective transition method, the Company recognized compensation cost for the six month periods ending June 30, 2008 and 2007 based on the grant date fair value estimated in accordance with Statement 123(R). This 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 of Statement 123; and (b) period compensation cost related to share-based payments granted on or after January 1, 2006. 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 $102,810 and $371,339 for the three month periods ended June 30, 2008 and 2007 respectively, and $295,664 and $706,549 for the six month periods ended June 30, 2008 and 2007, respectively, in accordance with Statement 123(R), in accordance with Statement 123(R). The Company did not capitalize any share-based compensation cost.

Options granted to consultants and other non-employees are accounted for in accordance with Emerging Issues Task Force (“EITF”) No. 96-18 "Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", and Financial Accounting Standards Board Interpretation No 28 “Accounting for Stock Appreciation Rights and Other Variable Option or Award Plans”. 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 $(287) and $259, respectively, for the three-and six months ended June 30, 2008 and $185 and $3,556, respectively for the three-and six months ended June 30, 2007.
 
11

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The Company has allocated share-based compensation costs and credits to general and administrative and research and development expenses as follows:
 
   
Three months ended June 30,
 
Six months ended June 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
                   
General and administrative expense:
                         
                           
Share-based employee compensation cost
 
$
75,362
 
$
249,623
 
$
215,405
 
$
471,544
 
Share-based consultant and non-employee (credit) cost
   
   
   
   
10,550
 
   
$
75,362
 
$
249,623
 
$
215,405
 
$
482,094
 
                           
Research and development expense:
                         
                           
Share-based employee compensation cost
 
$
27,735
 
$
121,531
 
$
80,000
 
$
231,449
 
Share-based consultant and non-employee (credit) cost
   
(287
)
 
185
   
259
   
(6,994
)
   
$