UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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.)
 
48 Wall Street, New York, New York 10005
(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 November 1, 2008 there were 70,624,232 shares of the issuer’s common stock, $.001 par value, outstanding.

1


INDEX 
 
   
Page
PART I
FINANCIAL INFORMATION
 
     
Item 1.
Unaudited Condensed Consolidated Balance Sheets
4
     
 
Unaudited Condensed Consolidated Statements of Operations
5
     
 
Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)
6
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
8
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
9
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
40
     
Item 4.
Controls and Procedures
40
     
PART II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
41
     
Item 1A.
Risk Factors
41
     
Item 6.
Exhibits
41
     
 
Signatures
42


2


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

3


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

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets 
 
 
 
September 30,
2008
 
December 31,
2007
 
Assets
 
 (Unaudited)
 
 (See Note 1)
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
 
$
35,664
 
$
649,686
 
Prepaid expenses and other current assets
   
75,422
   
215,852
 
Total current assets 
   
111,086
   
865,538
 
 
         
Investment in Hedrin JV
   
2,269
   
-
 
Property and equipment, net
   
11,920
   
44,533
 
Other assets
   
79,625
   
70,506
 
Total assets 
 
$
204,900
 
$
980,577
 
 
         
 Liabilities and Stockholders’ Deficiency
         
 
         
Current liabilities:
         
Secured 10% notes payable
 
$
70,000
 
$
-
 
Accounts payable
   
705,323
   
1,279,485
 
Accrued expenses
   
1,238,303
   
592,177
 
Total current liabilities 
   
2,013,626
   
1,871,662
 
               
Exchange obligation
   
2,949,176
   
-
 
Total liabilities 
   
4,962,802
   
1,871,662
 
               
Commitments and contingencies
         
 
         
Stockholders’ deficiency:
         
Preferred stock, $.001 par value. Authorized 1,500,000 shares; no shares issued
         
and outstanding at September 30, 2008 and December 31, 2007
         
Common stock, $.001 par value. Authorized 300,000,000 shares; 70,624,232
         
shares issued and outstanding at September 30, 2008 and December 31, 2007
   
70,624
   
70,624
 
Additional paid-in capital
   
54,566,421
   
54,037,361
 
Deficit accumulated during the development stage
   
(59,394,947
)
 
(54,999,070
)
Total stockholders’ deficiency  
   
(4,757,902
)
 
(891,085
)
 
         
Total liabilities and stockholders' deficiency 
 
$
204,900
 
$
980,577
 

See accompanying notes to condensed consolidated financial statements.

4

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
Cumulative period from August 6, 2001 (inception) to September 30
 
 
 
2008
 
2007
 
2008
 
2007
 
2008
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
$
498,853
 
$
1,808,958
 
$
1,864,652
 
$
7,360,040
 
$
28,353,695
 
General and administrative
   
884,705
   
898,063
   
2,600,303
   
2,865,161
   
16,452,666
 
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
   
1,383,558
   
2,707,021
   
4,464,955
   
10,225,201
   
59,156,276
 
 
                     
Operating loss
   
(1,383,558
)
 
(2,707,021
)
 
(4,464,955
)
 
(10,225,201
)
 
(59,156,276
)
 
                     
Other (income) expense:
                     
Equity in loss of Hedrin JV
   
140,138
   
   
247,731
   
   
247,731
 
Interest and other income
   
(148,184
)
 
(37,600
)
 
(335,613
)
 
(97,598
)
 
(1,157,510
)
Interest expense
   
18,804
   
   
18,804
   
475
   
44,838
 
Realized gain on sale of marketable equity securities
   
   
   
   
   
(76,032
)
Total other (income) expense
   
10,758
   
(37,600
)
 
(69,078
)
 
(97,123
)
 
(940,973
)
 
                     
Net loss
   
(1,394,316
)
 
(2,669,421
)
 
(4,395,877
)
 
(10,128,078
)
 
(58,215,303
)
 
                     
Preferred stock dividends (including imputed amounts)
   
   
   
   
   
(1,179,644
)
 
                     
Net loss applicable to common shares
 
$
(1,394,316
)
$
(2,669,421
)
$
(4,395,877
)
$
(10,128,078
)
$
(59,394,947
)
 
                     
Net loss per common share:
                     
Basic and diluted
 
$
(0.02
)
$
(0.04
)
$
(0.06
)
$
(0.15
)
   
 
                     
Weighted average shares of common stock outstanding:
                     
Basic and diluted
   
70,624,232
   
70,591,623
   
70,624,232
   
67,134,882
     
 
See accompanying notes to unaudited condensed consolidated financial statements.

5


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

6

 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficiency)
(Unaudited)
 
 
Series A convertible preferred stock
 
Series A convertible preferred stock
 
Common stock
 
Common stock
 
Additional paid-in capital
 
Subscription receivable
 
Deficit accumulated during development stage
 
Dividends payable in Series A preferred stock
 
Accumulated other comprehensive income (loss)
 
Unearned consulting services
 
Total stockholders’ equity (deficiency)
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
 
Common stock issued at $1.11 and $1.15, net of expenses
   
   
   
11,917,680
   
11,918
   
12,238,291
   
   
   
   
   
   
12,250,209
 
Common stock issued to vendor at $1.11 per share in satisfaction of accounts payable
   
   
   
675,675
   
676
   
749,324
   
   
   
   
   
   
750,000
 
Exercise of stock options
   
   
   
32,400
   
33
   
32,367
   
   
   
   
   
   
32,400
 
Exercise of warrants
   
   
   
279,845
   
279
   
68,212
   
   
   
   
   
   
68,491
 
Preferred stock dividend accrued
   
   
   
   
   
   
   
(175,663
)
 
175,663
   
   
   
 
Preferred stock dividends paid by issuance of shares
   
41,781
   
42
   
   
   
477,736
   
   
   
(479,074
)
 
   
   
(1,296
)
Conversion of preferred stock to common stock at $1.10 per share
   
(896,154
)
 
(896
)
 
8,146,858
   
8,147
   
(7,251
)
 
   
   
   
   
   
 
Share-based compensation
   
   
   
   
   
66,971
   
   
   
   
   
20,168
   
87,139
 
Reversal of unrealized gain on short-term investments
   
   
   
   
   
   
   
   
   
(12,250
)
 
   
(12,250
)
Stock issued in connection with acquisition of Tarpan Therapeutics, Inc.
   
   
   
10,731,052
   
10,731
   
11,042,253
   
   
   
   
   
   
11,052,984
 
Net loss
   
   
   
   
   
   
   
(19,140,997
)
 
   
   
   
(19,140,997
)
Balance at December 31, 2005
   
   
   
60,092,697
   
60,093
   
42,751,111
   
   
(33,271,695
)
 
   
987
   
   
9,540,496
 
 
                                                                   
Cashless exercise of warrants
   
   
   
27,341
   
27
   
(27
)
 
   
   
   
   
   
 
Share-based compensation
   
   
   
   
   
1,675,499
   
   
   
   
   
   
1,675,499
 
Unrealized loss on short-term investments
   
   
   
   
   
   
   
   
   
(987
)
 
   
(987
)
Costs associated with private placement
   
   
   
   
   
(15,257
)
 
   
   
   
   
   
(15,257
)
Net loss
   
   
   
   
   
   
   
(9,695,123
)
 
   
   
   
(9,695,123
)
Balance at December 31, 2006
   
   
   
60,120,038
   
60,120
 
$
44,411,326
   
   
(42,966,818
)
 
   
   
   
1,504,628
 
 
                                                                   
Common stock issued at $0.84 and $0.90 per shares, net of expenses
   
   
   
10,185,502
   
10,186
   
7,841,999
   
   
   
   
   
   
7,852,185
 
Common stock issued to directors at $0.72 per share in satisfaction of accounts payable
   
   
   
27,776
   
28
   
19,972
   
   
   
   
   
   
20,000
 
Common stock issued to in connection with in-licensing agreement at $0.90 per share
   
   
   
125,000
   
125
   
112,375
   
   
   
   
   
   
112,500
 
Common stock issued to in connection with in-licensing agreement at $0.80 per share
   
   
   
150,000
   
150
   
119,850
   
   
   
   
   
   
120,000
 
Exercise of warrants
   
   
   
10,327
   
15
   
7,219
   
   
   
   
   
   
7,234
 
Cashless exercise of warrants
   
   
   
5,589
   
   
(6
)
 
   
   
   
   
   
(6
)
Share-based compensation
   
   
   
   
   
1,440,956
   
   
   
   
   
   
1,440,956
 
Warrants issued for consulting
                           
83,670
                                 
83,670
 
Net loss
   
   
   
   
   
   
   
(12,032,252
)
 
   
   
   
(12,032,252
)
Balance at December 31, 2007
   
   
   
70,624,232
   
70,624
   
54,037,361
   
   
(54,999,070
)
 
   
   
   
(891,085
)
Sale of warrant
                           
150,000
                                 
150,000
 
Share-based compensation
   
   
   
   
   
379,060
   
   
   
   
   
   
379,060
 
Net loss
   
   
   
   
   
-
   
   
(4,395,877)
)
 
   
   
   
(4,395,877)
)
Balance at September 30, 2008
   
 
$
   
70,624,232
 
$
70,624
 
$
54,566,421
 
$
 
$
(59,394,947)
)
$
 
$
 
$
 
$
(4,757,902)
)
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
7

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine months ended
September 30,
 
Cumulative period from August 6, 2001
(inception) to
September 30, 2008
 
 
2008
 
2007
 
 
 
Net loss
 
$
(4,395,877
)
$
(10,128,078
)
$
(58,215,303
)
Adjustments to reconcile net loss to net cash used in operating activities:
                   
Equity in loss of Hedrin JV
   
247,731
   
   
247,731
 
Share-based compensation
   
379,060
   
1,078,185
   
3,744,043
 
Shares issued in connection with in-licensing agreement
   
   
232,500
   
232,500
 
Warrants issued to consultant
   
   
   
83,670
 
Amortization of intangible assets
   
   
   
145,162
 
Gain on sale of marketable equity securities
   
         
(76,032
)
Depreciation
   
23,258
   
40,406
   
219,083
 
Non cash portion of in-process research and development charge
   
   
   
11,721,623
 
Loss on impairment and disposition of intangible assets
   
   
   
2,462,108
 
Loss on sale of fixed assets
   
18,327
   
   
23,917
 
Changes in operating assets and liabilities, net of acquisitions:
                   
(Increase)/decrease in prepaid expenses and other current assets
   
140,430
   
62,425
   
(17,177
)
Increase in other assets
   
(9,119
)
 
-
   
(79,625
)
Increase /(decrease) in accounts payable
   
(574,162
)
 
(520,806
)
 
1,125,536
 
Increase in accrued expenses
   
646,126
   
388,627
   
697,982
 
Net cash used in operating activities
   
(3,524,226
)
 
(8,846,741
)
 
(37,684,782
)
Cash flows from investing activities:
                   
Purchase of property and equipment
   
(8,972
)
 
(9,135
)
 
(239,607
)
Cash paid in connection with acquisitions
   
   
   
(26,031
)
Net cash provided from the purchase and sale of short-term investments, net
   
   
   
435,938
 
Proceeds from the sale of license
   
   
   
200,001
 
Net cash (used in) provided by investing activities
   
(8,972
)
 
(9,135
)
 
370,301
 
Cash flows from financing activities:
                   
Repayments of notes payable to stockholders
   
   
   
(884,902
)
Proceeds related to sale of common stock, net
   
   
7,852,185
   
25,896,262
 
Proceeds from sale of preferred stock, net
   
   
   
9,046,176
 
Proceeds from exercise of warrants and stock options
   
   
7,228
   
138,219
 
Proceeds from the Hedrin JV Agreement, net
   
2,699,176
   
   
2,699,176
 
Sale of warrant
   
150,000
   
   
150,000
 
Proceeds from sale of 10% Secured Notes
   
70,000
   
   
70,000
 
Other, net
   
   
   
235,214
 
Net cash provided by financing activities
   
2,919,176
   
7,859,413
   
37,350,145
 
Net (decrease) increase in cash and cash equivalents
   
(614,022
)
 
(996,463
)
 
35,664
 
Cash and cash equivalents at beginning of period
   
649,686
   
3,029,118
   
 
Cash and cash equivalents at end of period
 
$
35,664
 
$
2,032,655
 
$
35,664
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Interest paid
 
$
 
$
475
 
$
26,033
 
Supplemental disclosure of noncash investing and financing activities:
                   
Common stock issued in satisfaction of accounts payable
 
$
 
$
20,000
 
$
750,000
 
Imputed preferred stock dividend
   
   
   
418,182
 
Preferred stock dividends accrued
   
   
   
761,462
 
Preferred stock dividends paid by issuance of shares
   
   
   
9,046,176
 
Conversion of preferred stock to common stock
   
   
   
759,134
 
Issuance of common stock for acquisitions
   
   
   
13,389,226
 
Issuance of common stock in connection with in-licensing agreement
   
   
232,500
   
232,500
 
Marketable equity securities received in connection with sale of license
   
   
   
359,907
 
Warrants issued to consultant
   
   
   
83,670
 
Net liabilities assumed over assets acquired in business combination
   
   
   
(675,416
)
Investment in Hedrin JV
   
250,000
   
   
250,000
 
Cashless exercise of warrants
   
   
6
   
33
 
Issuance of warrants to holders of 10% secured notes
   
   
   
 
 
See accompanying notes to condensed consolidated financial statements.
8


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

Segment Reporting

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

Income Taxes

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

Equity in Joint Venture

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

9


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

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

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS shall be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with General Accepted Accounting Principles. We have not yet assessed the impact of adopting SFAS 162.
 
In February 2008, the FASB issued two Staff Positions on SFAS 157: (1) FASB Staff Position No. FAS 157-1 (“FAS 157-1”),“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13,” and (2) FASB Staff Position No. FAS 157-2 (“FAS 157-2”),“Effective Date of FASB Statement No 157.” FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases, as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under Statement 13, from SFAS 157’s scope. FAS157-2 partially defers Statement 157’s effective date.  The adoption of FAS 157-1 and FAS 157-2 did not have a material impact on its financial statements.
 
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FAS 157-3"), which is effective upon issuance for all financial statements that have not been issued. FAS 157-3 clarifies the application of SFAS 157, in a market that is not active. FAS 157-3 does not have a material impact on the Company’s financial position, financial performance or cash flows.
 
10


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

The Company incurred a net loss of $4,395,877 and negative cash flows from operating activities of $3,524,226 for the nine month period ended September 30, 2008. The net loss applicable to common shares from date of inception, August 6, 2001, to September 30, 2008 amounts to $59,394,947.

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

The Company received approximately $2.0 million in February 2008 and approximately $1.0 million in June 2008 from a joint venture agreement. This joint venture agreement is more fully described in Note 8. The Company also received $70,000 in Secured Promissory Notes in September 2008. These notes are more fully described in Note 10.

Management believes that the Company will continue to incur net losses through at least September 30, 2009 and for the foreseeable future thereafter. Based on the resources of the Company available at September 30, 2008 including the net proceeds received from the February 2008 joint venture agreement, and the September 2008 sale of 10% Secured Promissory Notes, as more fully described in note 10, and taking into consideration the net proceeds from the November 2008 12% Secured Promissory Notes, as more fully described in note 11, management believes that the Company has sufficient capital to fund its operations until the middle of 2009. Management believes that the Company has a need for capital in order to sustain its operations and will need additional equity or debt financing or will need to generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations through 2009. 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.

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 19,500,189 and 18,634,521 as of September 30, 2008 and 2007, respectively. These amounts do not include the shares issuable in connection with the Hedrin JV (see Note 8); the 26,785,714 shares of common stock issuable upon exercise of the put or call rights; the up to 8,928,572 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.
 
11


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

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 nine month periods ending September 30, 2008 and 2007 based on the grant date fair value estimated in accordance with Statement 123(R). This includes (a) period compensation cost related to share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123; and (b) period compensation cost related to share-based payments granted on or after January 1, 2006. In accordance with the modified prospective method, the Company has not restated prior period results.

The Company recognizes compensation expense related to stock option grants on a straight-line basis over the vesting period. The Company recognized share-based compensation cost of $83,396 and $371,636 for the three month periods ended September 30, 2008 and 2007 respectively, and $379,060 and $1,078,185 for the nine month periods ended September 30, 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, the Company recognized share-based compensation (credit) / cost of $347 and $606, respectively, for the three-and nine months ended September 30, 2008 and $(8,767) and $(15,762), respectively for the three-and nine months ended September 30, 2007.

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
September 30,
   
Nine months ended
September 30,
 
     
2008
   
2007
   
2008
   
2007
 
                           
General and administrative expense:                          
Share-based employee compensation cost
 
$
64,071
 
$
254,870
 
$
279,476
 
$
726,414
 
Share-based consultant and non-employee (credit) cost
   
   
   
   
10,550
 
   
$
64,071
 
$
254,870
 
$
279,476
 
$
736,964
 
                           
Research and development expense:
                         
Share-based employee compensation cost
 
$
18,978
 
$
125,533
 
$
98,978
 
$
356,983
 
Share-based consultant and non-employee (credit) cost
   
347
   
(8,767
)
 
606
   
(15,762
)
   
$
19,325
 
$
116,766
 
$
99,584
 
$
341,221
 
                           
Total share-based cost
 
$
83,396
 
$
371,636
 
$
379,060
 
$
1,078,185
 

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 and 110. 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
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
                   
Expected Volatility
   
92.3
%
 
79.7 - 93.2
%
 
92.3
%
 
79.7 - 93.2
%
                           
Dividend yield
   
-
   
-
   
-
   
-
 
                           
Expected term (in years)
   
6
   
6 - 8
   
6
   
6 - 8
 
                           
Risk-free interest rate
   
2.81
%
 
4.56% - 4.96
%
 
2.81
%
 
4.56% - 4.96
%
 
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 September 30, 2008, under the 2003 Plan, 10,400,000 shares of common stock were authorized for issuance. At September 30, 2008, under the 2003 Plan, options to purchase 9,539,096 shares of common stock were outstanding. At September 30, 2008, there were 860,904 shares reserved for future grants under the 2003 Plan. 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 nine months ended September 30, 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.

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 September 2005, the 1995 Plan expired and no further options can be granted. As of September 30, 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 September 30, 2008 and changes during the nine 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
   
(324,972
)
 
0.17
             
Outstanding at September 30, 2008
   
10,676,336
 
$
0.94
   
7.19
 
$
-
 
Exercisable at September 30, 2008
   
8,093,025
 
$
1.12
   
6.56
       
Weighted average fair value of options granted during the nine months ended September 30, 2008
 
$
0.13
                   

14


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

As of September 30, 2008, the total compensation cost related to non-vested option awards not yet recognized is $510,555. The weighted average period over which it is expected to be recognized is approximately 1.4 years.
 
5. COMMITMENTS AND CONTINGENCIES

Swiss Pharma

The Company has been involved in an arbitration proceeding in Switzerland with Swiss Pharma Contract LTD (“Swiss Pharma”), a clinical site that the Company used in one of its obesity trials. On September 5, 2008, the sole arbitrator in Switzerland rendered an award in favor of Swiss Pharma, awarding to Swiss Pharma a total of $646,000 which amount includes a $323,000 contract penalty, a final services invoice of $48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses incurred in the arbitration process of $245,000, reimbursement of arbitration costs of $13,000 and interest through September 5, 2008 of $17,000.  Further, the arbitrator ruled that the Company must pay interest at the rate of 5% per annum on $371,000, the sum of the $323,000 contract penalty and the final services invoice of $48,000, from October 12, 2007 until paid.
 
The Company had previously recognized a liability to Swiss Pharma in the amount of $104,000 for the final services invoice. The remainder of the award, $542,000, has been expensed in September 2008. The Company has recognized research and development expense of $267,000, general and administrative expense of $257,000 and interest expense of $18,000 during the quarter ended September 30, 2008. The Company will continue to accrue interest at the rate of 5% per annum on the $371,000 until such amount has been settled.
 
The Company does not have sufficient cash or other current assets to satisfy the arbitrator's award.

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 $675,000 as well as performance based bonuses. These agreements have a remaining term of six months for one of the employees, and nine months for the second employee, and have a total remaining obligation under these agreements of $419,589 as of September 30, 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 June 30, 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.

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.
 
16


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

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 HedrinTM, 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”).

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.
 
17


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES
(A development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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, Hedrin Pharmaceuticals K/S, (the "Hedrin JV") and provided it with initial funding of $2.5 million and the Company assigned and transferred its North American rights in Hedrin to the Hedrin JV in return for a $2.0 million cash payment from the Hedrin JV and equity in the Hedrin JV representing 50% of the nominal equity interests in the Hedrin JV. At closing the Company recognized an investment in the Hedrin JV of $250,000 and an exchange obligation of $2,058,683. The exchange obligation represents the Company’s obligation to Nordic to issue the Company’s common stock in exchange for all or a portion of Nordic’s equity interest in the Hedrin JV upon the exercise by Nordic of the put issued to Nordic in the Hedrin JV Agreement transaction. The put is described below.

The original terms of the Hedrin JV Agreement also provided that 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 additional equity in the JV valued at $2.5 million, thereby maintaining the Company’s 50% ownership interest in the Hedrin JV. These terms have been amended as described below.

In June 2008 the Hedrin JV Agreement was amended (the "Hedrin JV Amended Agreement"). Under the amended terms Nordic invested an additional $1.0 million, for a total of $3.5 million, in the Hedrin JV and made an advance of $250,000 to the Hedrin JV and the Hedrin JV made an additional $1.0 million payment, for a total of $3.0 million, to the Company. The Hedrin JV also distributed additional ownership equity sufficient for each of the Company and Nordic to maintain their ownership interest at 50%. Under the amended terms, upon classification of Hedrin by the FDA as a Class II or Class III medical device Nordic is obligated to invest an additional $1.25 million, for a total investment of $5 million, into the Hedrin JV, the Hedrin JV is obligated to pay an additional $0.5 million, for a total of $3.5 million, to the Company, the $250,000 that Nordic advanced to the Hedrin JV in June becomes an equity investment in the Hedrin JV by Nordic and the Hedrin JV is obligated to issue to the Company and Nordic additional ownership interest in the Hedrin JV, thereby maintaining each of the Company’s and Nordic’s 50% ownership interest in the Hedrin JV. The Company’s exchange obligation increased by $894,546 as a result of the June 2008 closing. The $894,546 represents the gross amount paid in June 2008 by the Hedrin JV to the Company of $1,000,000 offset by the costs of the Hedrin JV Agreement transaction recognized by the Company subsequent to the February closing.

During the nine months ended September 30, 2008 the Company recognized $247,731 of equity in the loss of the Hedrin JV. At September 30, 2008, the Company’s investment in the Hedrin JV is $2,269 and the Company’s exchange obligation is $2,949,176.

18


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

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 September 30, 2008, the Company has recognized $315,036 of other income from management fees earned from the Hedrin JV which is included in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2008 as a component of interest and other income.

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.

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.

19


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

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 registration statement was declared effective on October 15, 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 additional registration statements to be declared effective by the Securities and Exchange Commission (“SEC”) within 105 calendar days from the filing date (the "Effective 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 the 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, $3.5 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.

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.

 
20


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

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.

10.  10% PROMISSORY NOTES

In September 2008, Manhattan entered into a series of 10% secured promissory notes (the “10% Notes”) with certain of our directors, officers and an employee (the “10% Note Holders”) for aggregate of $70,000. Principal and interest on the Notes shall be paid in cash on March 10, 2009 unless paid earlier by us. Pursuant to the secured promissory notes, we also issued to the Note Holders 5-year warrants to purchase an aggregate of 140,000 of our common stock at an exercise price of $0.20 per share. Manhattan granted to the Note Holders a continuing security interest in certain specific refunds, deposits and repayments due Manhattan and expected to be repaid to Manhattan in the next several months. At September 30, 2008 accrued an unpaid interest on the 10% Notes amounted to $351 and is reflected in the accompanying Balance Sheet as of September 30, 2008 as a component of accrued expenses.

21


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

11.  SUBSEQUENT EVENT - 12% PROMISSORY NOTES

On November 19,, 2008 the Company completed the first closing on a financing transaction. The Company sold $1 million of 12% senior secured notes (the 12% Notes) and issued warrants to the investors to purchase 33 million shares of the Company’s common stock at $0.09 per share. The warrants expire on December 31, 2013. The Company realized net proceeds from the financing of $0.8 million.
The financing transaction has a $1,000,000 minimum amount, which has been met, a $2,500,000 maximum amount and an overallotment of $1,000,000 for a total of $3,500,000. The financing transaction is still active and there maybe additional closings.

National Securities Corporation (“National”) was the placement agent for the transaction. National’s compensation for acting is placement agent is a cash fee of 10% of the gross proceeds received, a non-accountable expense allowance of 1.5% of the gross proceeds and a warrant to purchase such number of shares of the Company’s common stock equal to 15% of the shares underlying the warrants issued to the investors. At the first closing the Company paid $0.1 million in placement agent fees and a non-accountable expense allowance, and issued a warrant to purchase 5 million shares of the Company’s common stock at $0.09 per share. The warrant expires on December 13, 2013.
The 12% Notes mature two years after issuance. Interest on the 12% Notes is compounded quarterly and payable at maturity. The 12% Notes are secured by a pledge of certain of the Company’s assets.
The net proceeds of this first closing are to be paid out in monthly installments of $0.1 million. The monthly installments are to be paid as of the first of every month retroactive to October 1, 2008.

The issuance to the investors of warrants to purchase shares of the Company’s common stock at $0.09 per share changes the number of shares represented by the Nordic Put and the number of shares and exercise price of the Nordic Warrant. The Nor