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 o No x

As of May 6, 2008 there were 70,624,232 shares of the issuer’s common stock, $.001 par value, outstanding.

 

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Explanatory Note:

 

This Amendment No. 1 to Quarterly Report on Form 10-Q (the “Form 10-Q/A”) of Manhattan Pharmaceuticals, Inc. (the “Company,” “we,” “us,” or “our”) amends the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (the “Form 10-Q”), which was originally filed with the Securities and Exchange Commission (“SEC”) on May 20, 2008. As described in the Form 10-Q, due to the complexity of the accounting for the Hedrin JV transaction, the Company requested guidance from the SEC in concluding on the appropriate accounting treatment for this transaction. We have received guidance from the SEC on accounting for this transaction and we are filing this Form 10-Q/A to adjust the accounting for this transaction based on that guidance. This Form 10-Q/A restates our financial statements for the quarter ended March 31, 2008 to recognize our Investment in Hedrin JV of $230,127, to recognize our Exchange obligation of $2,058,683, to decrease our Additional paid-in capital of $1,808,683 and to recognize our equity in the loss of Hedrin JV of $19,873. These adjustments relate to a correction in the recording of the joint venture transaction with Nordic Biotech Venture Fund II K/S in which Hedrin Pharmaceuticals K/S (the “Hedrin JV”) was formed and began operations. In our Form 10-Q we recorded the net proceeds received from the Hedrin JV transaction as of March 31, 2008 of $1,808,683 as an addition to Additional paid-in capital and did not recognize our Investment in the Hedrin JV, the Exchange obligation or our equity in the loss of the Hedrin JV. The transaction should have been recorded as an Exchange obligation equal the net proceeds received from the Hedrin JV transaction as of March 31, 2008 of $1,808,683 plus the amount of our investment in the Hedrin JV at the closing of the Hedrin JV transaction in February 2008 of $250,000. In addition, we should have also recognized our equity in the loss of the Hedrin JV for the quarterly period ended March 31, 2008 of $19,873.

 

This Form 10-Q/A is being filed solely to amend and restate Items 1, 2 and 3 of Part I, and Item 6 of Part II.

 

2

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INDEX  

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Operations	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)	7
	Unaudited Condensed Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	36
Item 4.	Controls and Procedures	36
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 6.	Exhibits	37
	Signatures	38

 

3

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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.

4

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Part I – Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Balance Sheets

 

		March 31, 2008			December 31, 2007
		(Unaudited)			(See Note 1)
Assets
Current assets:
Cash and cash equivalents		$	1,133,124		$	649,686
Prepaid expenses			233,545			215,852
Total current assets			1,366,669			865,538
Investment in Hedrin JV			230,127			—
Property and equipment, net			36,621			44,533
Other assets			84,126			70,506
Total assets		$	1,717,543		$	980,577
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable		$	986,223		$	1,279,485
Accrued expenses			800,215			592,177
Total current liabilities			1,786,438			1,871,662
Exchange obligation			2,058,683			—
Total liabilities			3,845,121			1,871,662
Commitments and contingencies
Stockholders’ deficiency:
Preferred stock, $.001 par value. Authorized 1,500,000 shares; no shares issued
and outstanding at March 31, 2008 and December 31, 2007
Common stock, $.001 par value. Authorized 150,000,000 shares; 70,624,232
shares issued and outstanding at March 31, 2008 and December 31, 2007			70,624			70,624
Additional paid-in capital			54,380,215			54,037,361
Deficit accumulated during the development stage			(56,578,417	)		(54,999,070	)
Total stockholders’ deficiency			(2,127,578	)		(891,085	)
Total liabilities and stockholders' deficiency		$	1,717,543		$	980,577

 

See accompanying notes to condensed consolidated financial statements.

5

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three months ended March 31,						Cumulative period from August 6, 2001 (inception) to March 31,
		2008			2007			2008
Costs and expenses:
Research and development		$	800,071		$	1,679,448		$	27,289,113
General and administrative			814,060			914,724			14,666,424
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			1,614,131			2,594,172			56,305,452
Operating loss			(1,614,131	)		(2,594,172	)		(56,305,452	)
Other (income) expense:
Equity in loss of Hedrin JV			19,873			—			19,873
Interest and other income			(54,657	)		(30,390	)		(876,554	)
Interest expense			—			475			26,034
Realized gain on sale of marketable equity securities			—			—			(76,032	)
Total other income			(34,784	)		(29,915	)		(906,679	)
Net loss			(1,579,347	)		(2,564,257	)		(55,398,773	)
Preferred stock dividends (including imputed amounts)			—			—			(1,179,644	)
Net loss applicable to common shares		$	(1,579,347	)	$	(2,564,257	)	$	(56,578,417	)
Net loss per common share:
Basic and diluted		$	(0.02	)	$	(0.04	)
Weighted average shares of common stock outstanding:
Basic and diluted			70,624,232			60,120,038

 

See accompanying notes to condensed consolidated financial statements.

6

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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

 

7

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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	)
Share-based compensation			—			—			—			—			192,854			—			—			—			—			—			192,854
Sale of warrant			—			—			—			—			150,000			—			—			—			—			—			150,000
Net loss			—			—			—			—			—			—			(1,579,347	)		—			—			—			(1,579,347	)
Balance at March 31, 2008			—			—			70,624,232		$	70,624		$	54,380,215		$	—		$	(56,578,417	)	$	—		$	—		$	—		$	(2,127,578	)

 

See accompanying notes to condensed consolidated financial statements.

 

8

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

			Three months ended March 31,						Cumulative period from August 6, 2001 (inception) to March 31,
			2008			2007			2008
Cash flows from operating activities:
Net loss		$	(1,579,347	)	$	(2,564,257	)	$	(55,398,773	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of Hedrin JV			19,873			—			19,873
Share-based compensation			192,854			335,210			3,557,837
Shares issued in connection with in-licensing agreement			—			—			232,500
Warrants issued to consultant			—			—			83,670
Amortization of intangible assets			—			—			145,162
Gain on sale of marketable equity securities			—						(76,032	)
Depreciation			7,912			15,878			203,737
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			—			—			5,590
Changes in operating assets and liabilities, net of acquisitions:
(Increase)/decrease in prepaid expenses			(17,693	)		12,494			(175,300	)
Increase in other assets			—			(250,000	)		(70,506	)
Increase /(decrease) in accounts payable			(293,262	)		150,367			1,406,436
Increase in accrued expenses			208,038			119,218			259,894
Net cash used in operating activities			(1,461,625	)		(2,181,090	)		(35,622,181	)
Cash flows from investing activities:
Purchase of property and equipment			—			(6,267	)		(230,635	)
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			(13,620	)		(6,267	)		365,653
Cash flows from financing activities:
Repayments of notes payable to stockholders			—			—			(884,902	)
Proceeds related to sale of common stock, net			—			7,848,031			25,896,262
Proceeds from sale of preferred stock, net			—			—			9,046,176
Proceeds from exercise of warrants and stock options			—			—			138,219
Proceeds from Hedrin JV Agreement, net			1,958,683			—			1,958,683
Other, net			—			—			235,214
Net cash provided by financing activities			1,958,683			7,848,031			36,389,652
Net increase in cash and cash equivalents			483,438			5,660,674			1,133,124
Cash and cash equivalents at beginning of period			649,686			3,029,118			—
Cash and cash equivalents at end of period		$	1,133,124		$	8,689,792		$	1,133,124
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		$	—		$	—		$	770,000
Imputed preferred stock dividend			—			—			418,182
Preferred stock dividends accrued			—			—			761,462
Preferred stock dividends paid by issuance of shares			—			—			759,134
Conversion of preferred stock to common stock			—			—			1,067
Issuance of common stock for acquisitions			—			—			13,389,226
Issuance of common stock in connection with in-licensing agreement			—			—			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			—			27			33

 

See accompanying notes to condensed consolidated financial statements.

9

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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 three month period ended March 31, 2008 and 2007.

As of March 31, 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 7) 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.

10

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

New Accounting Pronouncements

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 $1,579,347 and negative cash flows from operating activities of $1,461,625 for the three month period ended March 31, 2008. The net loss applicable to common shares from date of inception, August 6, 2001, to March 31, 2008 amounts to $56,578,417.

The Company received approximately $7.9 million net 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 from a joint venture agreement in February 2008. This joint venture agreement is more fully described in Note 7.

Management believes that the Company will continue to incur net losses through at least March 31, 2009 and for the foreseeable future thereafter. Based on the resources of the Company available at December 31, 2007 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 through 2008. Management believes that the Company 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.

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.

 

11

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 19,685,161 and 17,886,567 as of March 31, 2008 and 2007, respectively. These amounts do not include the shares issuable in connection with the Hedrin JV (see Note 7); 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 three month periods ending March 31, 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 $192,308 and $335,210 for the three month periods ended March 31, 2008 and 2007, respectively, 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 as of March 31, 2008 and 2007, net of amortization, the Company recognized share-based compensation cost of $546 and $3,371, respectively, for the three month periods ended March 31, 2008 and 2007, respectively.

12

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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 March 31,
		2008			2007
General and administrative expense:
Share-based employee compensation costs		$	140,043		$	221,921
Share-based consultant and non-employee costs			—			10,550
Total general and administrative expense		$	140,043		$	232,471
Research and development expense:
Share-based employee compensation costs		$	52,265		$	109,918
Share-based consultant and non-employee (credits) costs			546			(7,179	)
Total research and development expense		$	52,811		$	102,739
Total share-based costs		$	192,854		$	335,210

 

To compute compensation expense in 2008 and 2007, 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 data related to its common stock for the application of Statement 123(R). 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 as permitted by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. The expected forfeiture rates are based on the historical 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.

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 2008 and 2007:

		Three months ended March 31,
		2008			2007
Expected Volatility			93	%		55	%
Dividend yield			—			—
Expected term (in years)			6			6
Risk-free interest rate			2.81	%		4.88	%

 

13

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has shareholder-approved stock incentive 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 common stock. The Company increased the number of shares of common stock reserved for issuance under the 2003 Plan in August 2005 by 2,000,000 shares and in May 2007 by 3,000,000 shares. At March 31, 2008, under the 2003 Plan, 10,400,000 shares of common stock were authorized for issuance. At March 31, 2008, under the 2003 Plan, options to purchase 9,864,068 shares of common stock were outstanding. The options have a maximum term of 10 years and vest over a period determined by the Company’s Board of Directors (generally three 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. Under the 2003 Plan, the Company granted options to purchase an aggregate of 2,967,500 shares of common stock during the three months ended March 31, 2008 at an exercise price of $0.17 per share. In addition, 27,776 shares of common stock were issued during 2007 under the 2003 Plan.

At March 31, 2008, there were 508,156 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 shares reserved for stock option grants. In June 2005, the 1995 Plan expired and no further options can be granted. As of March 31, 2008, options to purchase 1,137,240 shares were outstanding under the 1995 Plan and no shares were reserved for future stock option grants.

A summary of the status of the Company’s outstanding stock options as of March 31, 2008 and changes during the three months then ended is presented below:

		Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (years)			Aggregate Intrinsic Value
Outstanding at December 31, 2007			8,033,808		$	1.25
Granted:
Officers			2,400,000
Directors			375,000
Employees			192,500
Total granted			2,967,500			0.17
Exercised			-
Cancelled			-
Outstanding at March 31, 2008			11,001,308		$	0.96			7.55		$	500
Exercisable at March 31, 2008			6,687,574		$	1.10			6.96
Weighted average fair value of options granted during the three months ended March 31, 2008		$	0.13

 

14

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2008, the total compensation cost related to non-vested option awards not yet recognized is $717,769. The weighted average period over which it is expected to be recognized is approximately 1.5 years.

 

5. COMMITMENTS AND CONTINGENCIES

Swiss Pharma

Swiss Pharma Contract LTD, or Swiss Pharma, a clinical site that the Company used in one of its obesity trials, gave notice to the Company that Swiss Pharma believes it is entitled to receive an additional payment of $322,776 for services in connection with that clinical trial. While the contract between the Company and Swiss Pharma provides for additional payments if certain conditions are met, Swiss Parma has not specified which conditions they believe have been achieved and the Company does not believe that Swiss Pharma is entitled to additional payments and has not accrued any of these costs as of March 31, 2008 and December 31, 2007. The contract between the Company and Swiss Pharma provides for arbitration in the event of a dispute, such as this claim for an additional payment. On March 10, 2008, Swiss Pharma filed for arbitration with the Swiss Chamber of Commerce. As the Company does not believe that Swiss Pharma is entitled to additional payments, the Company intends to defend its position in arbitration. On April 2, 2008, the Company filed its statement of defense and counterclaim for recovery of costs incurred by the Company as a result of Swiss Pharma’s failure to meet agreed upon deadlines under the contract.

Therapeutics, Inc.

During 2007, we entered into an agreement with Therapeutics, Inc. for the conduct of a Phase 2a clinical trial of PTH (1-34). The amount of the agreement is approximately $845,000. The remaining financial commitment at March 31, 2008 related to the conduct of the clinical trial is approximately $430,000. This clinical trial is expected to conclude in the second quarter of 2008.

Contentions of a Former Employee

In February 2007, a former employee of the Company alleged an ownership interest in two of the Company’s provisional patent applications covering our discontinued product development program for Oleoyl-estrone. Also, without articulating precise legal claims, the former employee contends that the Company wrongfully characterized the former employee’s separation from employment as a resignation instead of a dismissal in an effort to harm the former employee’s immigration sponsorship efforts, and, further, to wrongfully deprive the former employee of the former employee’s alleged rights in two of the Company’s provisional patent applications.  The former employee is seeking an unspecified amount in damages. The Company refutes the former employee’s contentions and intends to vigorously defend itself should the former employee file claims against the Company. There have been no further developments with respect to these contentions.

 

15

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Employment Agreements

The Company has employment agreements with two employees for the payment of aggregate annual base salaries of $655,000 as well as performance based bonuses. These agreements have a remaining term of one year for one of the employees, and 15 months for the second employee, and have a total remaining obligation under these agreements of $738,000 as of March 31, 2008.

 

6. PRIVATE PLACEMENT OF COMMON SHARES

On March 30, 2007, the Company entered into a series of subscription agreements with various institutional and other accredited investors for the issuance and sale in a private placement of an aggregate of 10,185,502 shares of its common stock for total net proceeds of approximately $7.85 million, after deducting commissions and other costs of the transaction. Of the total amount of shares issued, 10,129,947 were sold at a per share price of $0.84, and an additional 55,555 shares were sold to an entity affiliated with a director of the Company, at a per share price of $0.90, the closing sale price of the common stock on March 29, 2007. Pursuant to the subscription agreements, the Company also issued to the investors 5-year warrants to purchase an aggregate of 3,564,897 shares of common stock at an exercise price of $1.00 per share. The warrants are exercisable during the period commencing March 31, 2008 and ending March 30, 2012. Gross and net proceeds from the private placement were $8,559,155 and $7,852,185, respectively.

 

Pursuant to these subscription agreements the Company filed a registration statement on Form S-3 covering the resale of the shares issued in the private placement, including the shares issuable upon exercise of the investor warrants and the placement agent warrants, with the Securities and Exchange Commission on May 9, 2007, which was declared effective by the Securities and Exchange Commission on May 18, 2007.

The Company engaged Paramount BioCapital, Inc. (“Paramount”), an affiliate of a significant stockholder of the Company, as its placement agent in connection with the private placement. In consideration for its services, the Company paid aggregate cash commissions of approximately $600,000 and issued to Paramount a 5-year warrant to purchase an aggregate of 509,275 shares at an exercise price of $1.00 per share.

16

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. IN-LICENSING TRANSACTIONS

Altoderm License Agreement

On April 3, 2007, the Company entered into a license agreement for “Altoderm” (the “Altoderm Agreement”) with Thornton & Ross LTD (“T&R”). Pursuant to the Altoderm Agreement, the Company acquired an exclusive North American license to certain patent rights and other intellectual property relating to Altoderm, a topical skin lotion product candidate using sodium cromoglicate for the treatment of atopic dermatitis. In accordance with the terms of the Altoderm Agreement, the Company issued 125,000 shares of its common stock, valued at $112,500, and made a cash payment of $475,000 to T&R upon the execution of the agreement. These amounts have been included in research and development expense. Further, the Company agreed to make future milestone payments to T&R comprised of various combinations of cash and common stock in respective aggregate amounts of $5,675,000 and 875,000 shares of common stock upon the achievement of various clinical and regulatory milestones. The Company also agreed to pay royalties on net sales of products using the licensed patent rights at rates ranging from 10% to 20%, depending on the level of annual net sales, and subject to an annual minimum royalty payment of $1 million in each year following the first commercial sale of Altoderm. The Company may sublicense the patent rights. The Company agreed to pay T&R 30% of the royalties received by the Company under such sublicense agreements.

 

Altolyn License Agreement

On April 3, 2007, the Company and T&R also entered into a license agreement for “Altolyn” (the “Altolyn Agreement”). Pursuant to the Altolyn Agreement, the Company acquired an exclusive North American license to certain patent rights and other intellectual property relating to Altolyn, an oral formulation product candidate using sodium cromoglicate for the treatment of mastocytosis, food allergies, and inflammatory bowel disorder. In accordance with the terms of the Altolyn Agreement, the Company made a cash payment of $475,000 to T&R upon the execution of the agreement. This amount is included in research and development expense. Further, the Company agreed to make future cash milestone payments to T&R in an aggregate amount of $5,675,000 upon the achievement of various clinical and regulatory milestones. The Company also agreed to pay royalties on net sales of products using the licensed patent rights at rates ranging from 10% to 20%, depending on the level of annual net sales, and subject to an annual minimum royalty payment of $1 million in each year following the first commercial sale of Altolyn. The Company may sublicense the patent rights. The Company agreed to pay T&R 30% of the royalties received by the Company under such sublicense agreements.

Hedrin License Agreement

On June 26, 2007, the Company entered into an exclusive license agreement for “Hedrin” (the “Hedrin License Agreement”) with T&R and Kerris, S.A. (“Kerris”). Pursuant to the Hedrin License Agreement, the Company has acquired an exclusive North American license to certain patent rights and other intellectual property relating to Hedrin(TM), a non-insecticide product candidate for the treatment of head lice. In addition, on June 26, 2007, the Company entered into a supply agreement with T&R pursuant to which T&R will be the Company’s exclusive supplier of Hedrin product (the “Hedrin Supply Agreement”).

17

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In consideration for the license, the Company issued to T&R and Kerris (jointly, the “Licensor”) a combined total of 150,000 shares of its common stock valued at $120,000. In addition, the Company also made a cash payment of $600,000 to the Licensor. These amounts are included in research and development expense. Further, the Company agreed to make future milestone payments to the Licensor in the aggregate amount of $2,500,000 upon the achievement of various clinical, regulatory, and patent issuance milestones, as well as up to $2,500,000 in a one-time success fee based on aggregate sales of the product by the Company and its licensees of at least $50,000,000. The Company also agreed to pay royalties of 8% (or, under certain circumstances, 4%) on net sales of licensed products. The Company’s exclusivity under the Hedrin License Agreement is subject to an annual minimum royalty payment of $1,000,000 (or, under certain circumstances, $500,000) in each of the third through seventh years following the first commercial sale of Hedrin. The Company may sublicense its rights under the Hedrin License Agreement with the consent of Licensor and the proceeds resulting from such sublicenses will be shared with the Licensor.

 

Pursuant to the Hedrin Supply Agreement, the Company has agreed that it and its sublicensees will purchase their respective requirements of the Hedrin product from T&R at agreed upon prices. Under certain circumstances where T&R is unable to supply Hedrin products in accordance with the terms and conditions of the Hedrin Supply Agreement, the Company may obtain products from an alternative supplier subject to certain conditions. The term of the Hedrin Supply Agreement ends upon termination of the Hedrin License Agreement.

 

8.  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 50/50 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 (the "Hedrin JV") and provided it with initial funding of $2.5 million. On February 25, 2008 the Company assigned and transferred its North American rights in Hedrin to the Hedrin JV in return for a $2.0 million cash payment and equity in the Hedrin JV representing 50% of the nominal equity interests in the Hedrin JV.  This Amendment No. 1 to Quarterly Report on Form 10-Q (the “Form 10-Q/A”) of Manhattan Pharmaceuticals, Inc. (the “Company,” “we,” “us,” or “our”) amends the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (the “Form 10-Q”), which was originally filed with the Securities and Exchange Commission (“SEC”) on May 20, 2008. As described in the Form 10-Q, due to the complexity of the accounting for the Hedrin JV transaction, the Company requested guidance from the SEC in concluding on the appropriate accounting treatment for this transaction. We have received guidance from the SEC on accounting for this transaction and we are filing this Form 10-Q/A to adjust the accounting for this transaction based on that guidance. This Form 10-Q/A restates our financial statements for the quarter ended March 31, 2008 to recognize our Investment in Hedrin JV of $230,127, to recognize our Exchange obligation of $2,058,683, to decrease our Additional paid-in capital of $1,808,683 and to recognize our equity in the loss of Hedrin JV of $19,873. These adjustments relate to a correction in the recording of the joint venture transaction with Nordic Biotech Venture Fund II K/S in which Hedrin Pharmaceuticals K/S (the “Hedrin JV”) was formed and began operations. In our Form 10-Q we recorded the net proceeds received from the Hedrin JV transaction as of March 31, 2008 of $1,808,683 as an addition to Additional paid-in capital and did not recognize our Investment in the Hedrin JV, the Exchange obligation or our equity in the loss of the Hedrin JV. The transaction should have been recorded as an Exchange obligation equal the net proceeds received from the Hedrin JV transaction as of March 31, 2008 of $1,808,683 plus the amount of our investment in the Hedrin JV at the closing of the Hedrin JV transaction in February 2008 of $250,000. In addition, we should have also recognized our equity in the loss of the Hedrin JV for the quarterly period ended March 31, 2008 of $19,873.

 

18

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Should the Hedrin JV be successful in achieving a payment milestone, namely that by September 30, 2008, the FDA determines to treat Hedrin as a medical device, Nordic will purchase an additional $2.5 million of equity in the Hedrin JV, whereupon the Hedrin JV will pay the Company an additional $1.5 million in cash and issue to the Company an additional $2.5 million in equity in the Hedrin JV, thereby maintaining the Company’s 50% ownership interest in the Hedrin JV.

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, which for 2008, on an annualized basis, is $527,000. As of March 31, 2008, the Company has recognized $51,496 of other income from management fees earned from the Hedrin JV.

Nordic paid to the Company a non-refundable fee of $150,000 at the closing for the right to receive a warrant covering 7.1 million shares of the Company’s common stock, exercisable for $0.14 per share. The warrant is issuable 90 days from closing, provided Nordic has not exercised all or a part of its put, as described below. The Company issued the warrant to Nordic on April 30, 2008. The per share exercise price of the warrant was based on the volume weighted average price of the Company’s common stock for the period prior to the signing of the Hedrin JV Agreement.

Nordic has an option to put all or a portion of its equity interest in the Hedrin JV to the Company in exchange for the Company’s common stock. The shares of the Company’s common stock to be issued upon exercise of the put will be calculated by multiplying the percentage of Nordic’s equity in the Hedrin JV that Nordic decides to put to the Company multiplied by the dollar amount of Nordic’s investment in Limited Partnership divided by $0.14, as adjusted from time to time. The put option is exercisable immediately and expires at the earlier of ten years or when Nordic’s distributions from the Limited Hedrin JV exceed five times the amount Nordic invested in the Hedrin JV.

The Company has an option to call all or a portion of Nordic’s equity interest in the Hedrin JV in exchange for the Company’s common stock. The Company cannot begin to exercise its call until the price of the Company’s common stock has closed at or above $1.40 per share for 30 consecutive trading days. During the first 30 consecutive trading day period in which the Company’s common stock closes at or above $1.40 per share the Company can exercise up to 25% of its call option. During the second 30 consecutive trading day period in which the Company’s common stock closes at or above $1.40 per share the Company can exercise up to 50% of its call option on a cumulative basis. During the third 30 consecutive trading day period in which the Company’s common stock closes at or above $1.40 per share the Company can exercise up to 75% of its call option on a cumulative basis. During the fourth 30 consecutive trading day period in which the Company’s common stock closes at or above $1.40 per share the Company can exercise up to 100% of its call option on a cumulative basis. The shares of the Company’s common stock to be issued upon exercise of the call will be calculated by multiplying the percentage of Nordic’s equity in the Limited Partnership that the Company calls, as described above, multiplied by the dollar amount of Nordic’s investment in the Hedrin JV divided by $0.14. Nordic can refuse the Company’s call by either paying the Company up to $1.5 million or forfeiting all or a portion of their put, calculated on a pro rata basis for the percentage of the Nordic equity interest called by the Company.

19

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Hedrin JV's Board consists of 4 members, 2 appointed by the Company and 2 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. In the event that the payment milestone described above is not achieved by June 30, 2008, then the Hedrin JV's Board will increase to 5 members, 2 appointed by the Company and 3 appointed by Nordic.

After the closing, at Nordic's request, the Company will nominate a person identified by Nordic to serve on the Company’s Board of Directors.

The Company granted Nordic registration rights for the shares to be issued upon exercise of the warrant, the put or the call. The Company filed an initial registration statement on May 1, 2008. The Company is required to file additional registration statements, if required, within 45 days of the date the Company first knows that such additional registration statement was required. The Company is required to use commercially reasonable efforts to cause the registration statement to be declared effective by the Securities and Exchange Commission (“SEC”) within 105 calendar days from the filing date. If the Company fails to file a registration statement on time or if a registration statement is not declared effective by the SEC within 105 days of filing the Company will be required to pay to Nordic, or its assigns, an amount in cash, as partial liquidated damages, equal to 0.5% per month of the amount invested in the Hedrin JV by Nordic until the registration statement is declared effective by the SEC. In no event shall the aggregate amount payable by the Company exceed 9% of the amount invested in the Hedrin JV by Nordic.

The profits of the Hedrin JV will be shared by the Company and Nordic in accordance with their respective equity interests in Limited Partnership, which are currently 50% to each, except that Nordic will get a minimum distribution from the Hedrin JV equal to 5% on Hedrin sales, as adjusted for any change in Nordic’s equity interest in the Limited Partnership. If the Hedrin JV realizes a profit equal to or greater than a 10% royalty on Hedrin sales, then profits will be shared by the Company and Nordic in accordance with their respective equity interests in the Limited Partnership. However, in the event of a liquidation of the Limited Partnership, Nordic’s distribution in liquidation will be at least equal to the amount Nordic invested in the Hedrin JV ($5 million if the payment milestone described above is met, $2.5 million if it is not met) plus 10% per year, less the cumulative distributions received by Nordic from the Hedrin JV. Further, in no event shall Nordic’s distribution in liquidation be greater than assets available for distribution in liquidation.

 

20

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MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9.  AMERICAN STOCK EXCHANGE

In September 2007, the Company received notice from the staff of The American Stock Exchange, or AMEX, indicating that the Company was not in compliance with certain continued listing standards set forth in the AMEX Company Guide. Specifically, AMEX notice cited the Company’s failure to comply, as of June 30, 2007, with section 1003(a)(ii) of the AMEX Company Guide as the Company had less than $4,000,000 of stockholders’ equity and had losses from continuing operations and /or net losses in three or four of our most recent fiscal years and with section 1003(a)(iii) which requires the Company to maintain $6,000,000 of stockholders’ equity if the Company has experienced losses from continuing operations and /or net losses in its five most recent fiscal years.

In order to maintain our AMEX listing, the Company was required to submit a plan to AMEX advising the exchange of the actions the Company has taken, or will take, that would bring the Company into compliance with all the continued listing standards by April 16, 2008. The Company submitted such a plan in October 2007. If the Company is not in compliance with the continued listing standards at the end of the plan period, or if the Company has not made progress consistent with the plan during the period, AMEX staff could have initiated delisting proceedings.

Under the terms of the Hedrin JV Agreement, the number of potentially issuable shares represented by the put and call features thereof and the warrant issuable to Nordic, would exceed 19.9% of the Company’s total outstanding shares and would be issued at a price below the greater of book or market value. As a result, under AMEX regulations, the Company would not have been able to complete the transaction without first receiving either stockholder approval for the transaction, or a formal “financial viability” exception from AMEX’s stockholder approval requirement. The Company estimated that obtaining stockholder approval to comply with AMEX regulations would take a minimum of 45 days to complete. The Company discussed the financial viability exception with AMEX for several weeks and had neither received the exception nor been denied the exception. The Company determined that our financial condition required the Company to complete the transaction immediately, and that the Company’s financial viability depended on the completion of the Hedrin JV Agreement without further delay.

Accordingly, to maintain the Company’s financial viability, on February 28, 2008, the Company announced that it had formally notified AMEX that the Company intended to voluntarily delist its common stock from AMEX. The delisting became effective on March 26, 2008.

The Company’s common stock now trades on the Over the Counter Bulletin Board under the symbol “MHAN”. The Company intends to maintain corporate governance, disclosure and reporting procedures consistent with applicable law.

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