Large accelerated filer   o  Accelerated filer   o  Non-accelerated filer   o Smaller reporting company  x

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

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

---

INDEX 

 

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

 

2

---

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities and Exchange Act of 1934. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “may,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. These statements are therefore subject to risks and uncertainties, known and unknown, which could cause actual results and developments to differ materially from those expressed or implied in such statements. Such risks and uncertainties relate to, among other factors:

 

·

the development of our drug candidates;

·

the regulatory approval of our drug candidates;

·

our use of clinical research centers and other contractors;

·

our ability to find collaborative partners for research, development and commercialization of potential products;

·

acceptance of our products by doctors, patients or payers;

·

our ability to market any of our products;

·

our history of operating losses;

·

our ability to compete against other companies and research institutions;

·

our ability to secure adequate protection for our intellectual property;

·

our ability to attract and retain key personnel;

·

availability of reimbursement for our product candidates;

·

the effect of potential strategic transactions on our business;

·

our ability to obtain adequate financing; and

·

the volatility of our stock price.

 

Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3

---

Part I – Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Balance Sheets 

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

 

See accompanying notes to condensed consolidated financial statements.

4

---

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(Unaudited)

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

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)

(Unaudited)

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

 

6

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Consolidated Statement of Stockholders’ Equity (Deficiency)

(Unaudited)

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

 

See accompanying notes to condensed consolidated financial statements.

 

7

---

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

  

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

See accompanying notes to condensed consolidated financial statements.

8

---

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

Segment Reporting

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

Income Taxes

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

Equity in Joint Venture

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

9

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS No. 141, “Business Combinations” (“SFAS 141R”). The revision is intended to simplify existing guidance and converge rulemaking under U.S. generally accepted accounting principles with international accounting standards. SFAS 141R applies prospectively to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact of the provisions of the revision on its consolidated results of operations and financial condition.

 

In March 2008, the FASB issued SFAS No. 161 "Disclosures About Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity's derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective for the Company as of January 1, 2009. The Company does not believe that SFAS 161 will have any impact on its consolidated financial statements.

2. LIQUIDITY

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

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

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

Management believes that the Company will continue to incur net losses through at least June 30, 2009 and for the foreseeable future thereafter. Based on the resources of the Company available at June 30, 2008 and the net proceeds received from the February 2008 joint venture agreement, management does not believe that the Company has sufficient capital to fund its operations into the fourth quarter of 2008. Management believes that the Company has an immediate need for capital in order to sustain its operations and will need additional equity or debt financing or will need to generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations through 2008. Furthermore, we will need additional financing thereafter to complete development and commercialization of our products. There can be no assurances that we can successfully complete development and commercialization of our products.

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

10

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

3. COMPUTATION OF NET LOSS PER COMMON SHARE

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

4. SHARE-BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” (“Statement 123(R)”) for employee options using the modified prospective transition method. Statement 123(R) revised Statement 123 “Accounting for Stock-based Compensation” to eliminate the option to use the intrinsic value method and required the Company to expense the fair value of all employee options over the vesting period. Under the modified prospective transition method, the Company recognized compensation cost for the six month periods ending June 30, 2008 and 2007 based on the grant date fair value estimated in accordance with Statement 123(R). This includes (a) period compensation cost related to share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123; and (b) period compensation cost related to share-based payments granted on or after January 1, 2006. In accordance with the modified prospective method, the Company has not restated prior period results.

The Company recognizes compensation expense related to stock option grants on a straight-line basis over the vesting period. The Company recognized share-based compensation cost of $102,810 and $371,339 for the three month periods ended June 30, 2008 and 2007 respectively, and $295,664 and $706,549 for the six month periods ended June 30, 2008 and 2007, respectively, in accordance with Statement 123(R), in accordance with Statement 123(R). The Company did not capitalize any share-based compensation cost.

Options granted to consultants and other non-employees are accounted for in accordance with Emerging Issues Task Force (“EITF”) No. 96-18 "Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", and Financial Accounting Standards Board Interpretation No 28 “Accounting for Stock Appreciation Rights and Other Variable Option or Award Plans”. Accordingly, such options are recorded at fair value at the date of grant and subsequently adjusted to fair value at the end of each reporting period until such options vest, and the fair value of the options, as adjusted, is amortized to consulting expense over the related vesting period. As a result of adjusting consultant and other non-employee options to fair value, the Company recognized share-based compensation (credit) / cost of $(287) and $259, respectively, for the three-and six months ended June 30, 2008 and $185 and $3,556, respectively for the three-and six months ended June 30, 2007.

 

11

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has allocated share-based compensation costs and credits to general and administrative and research and development expenses as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2008			2007			2008			2007
General and administrative expense:
Share-based employee compensation cost		$	75,362		$	249,623		$	215,405		$	471,544
Share-based consultant and non-employee (credit) cost			—			—			—			10,550
		$	75,362		$	249,623		$	215,405		$	482,094
Research and development expense:
Share-based employee compensation cost		$	27,735		$	121,531		$	80,000		$	231,449
Share-based consultant and non-employee (credit) cost			(287	)		185			259			(6,994	)
		$	27,448		$	121,716		$	80,259		$	224,455
Total share-based cost		$	102,810		$	371,339		$	295,664		$	706,549

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.

12

---

 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table shows the weighted average assumptions the Company used to develop the fair value estimates for the determination of the compensation charges in 2008 and 2007:

		Three months ended June 30,						Six months ended June 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	%