UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Amendment No. 1 to
FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008

OR

o 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
(State or other jurisdiction of
incorporation or organization)
36-3898269
(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 o

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 o No x

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


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


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


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


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

 
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


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


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


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

 
 
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


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


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


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

 
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

 
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


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.