Unassociated Document
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, 2009

OR

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

Commission file number 001-32639

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

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

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  ¨
 
Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File  required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨ No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ¨  Accelerated filer   ¨  Non-accelerated filer   ¨ 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 4, 2009 there were 70,624,232 shares of the issuer’s common stock, $.001 par value, outstanding.

 
 
 

INDEX
 
   
Page
PART I
FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements:
  
     
 
Unaudited Condensed Balance Sheets
4
     
 
Unaudited Condensed Statements of Operations
5
     
 
Unaudited Condensed Statement of Stockholders’ Equity (Deficiency)
6
     
 
Unaudited Condensed Statements of Cash Flows
8
     
 
Notes to Unaudited Condensed  Financial Statements
10
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
36
     
Item 4T.
Controls and Procedures
36
     
PART II
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
37
     
Item 1A.
Risk Factors
37
     
Item 6.
Exhibits
37
     
 
Signatures
38

 
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 product candidates;
 
·
the regulatory approval of our product 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 Financial Statements
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Balance Sheets

   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
(Unaudited)
    
(See Note 1)
  
Assets
            
Current assets:
            
Cash and cash equivalents
   $ 153,641     $ 106,023  
Restricted cash
     -       730,499  
Other current assets
     86,609       37,718  
Total current assets
     240,250       874,240  
                 
Investment in Hedrin JV
     162,952       -  
Property and equipment, net
     4,775       9,072  
Secured 12% notes payable issue costs
     253,209       330,756  
Other assets
     21,370       34,895  
Total assets
   $ 682,556     $ 1,248,963  
                 
Liabilities and Stockholders' Deficiency
                
                 
Current Liabilities:
                
Secured 10% notes payable
   $ -     $ 70,000  
Accounts payable
     143,065       542,296  
Accrued expenses
     774,320       874,072  
Derivative liability
     681,111       -  
Total current liabilities
     1,598,496       1,486,368  
                 
Secured 12% notes payable, net
     1,607,610       1,174,107  
Interest payable on secured 12% notes payable
     171,674       15,237  
Exchange obligation
     3,949,176       2,949,176  
Total liabilities
     7,326,956       5,624,888  
                 
Commitments and contingencies
                
                 
Stockholders’ deficiency:
                
Preferred stock, $.001 par value. Authorized 1,500,000 shares; no shares
                
issued and outstanding at September 30, 2009 and December 31, 2008
     -       -  
Common stock, $.001 par value. Authorized 300,000,000 shares;
                
70,624,232 shares issued and outstanding at September 30, 2009
                
and December 31, 2008
     70,624       70,624  
Additional paid-in capital
     54,995,498       54,821,379  
Deficit accumulated during the development stage
     (61,710,522 )     (59,267,928 )
Total stockholders’ deficiency
     (6,644,400 )     (4,375,925 )
Total liabilities and stockholders' deficiency
   $ 682,556     $ 1,248,963  

See accompanying notes to financial statements.

 
4
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)

   
Three months ended
September 30,
    
Nine months ended
September 30,
    
Cumulative
period from
August 6, 2001
(inception) to
September 30,
  
   
2009
    
2008
    
2009
    
2008
    
2009
  
                               
Revenue
   $ -     $ -     $ -     $ -     $ -  
                                         
Costs and expenses:
                                        
Research and development
     5,574       498,853       57,154       1,864,652       28,348,989  
General and administrative
     390,066       884,705       1,373,083       2,600,303       17,835,356  
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
     395,640       1,383,558       1,430,237       4,464,955       60,534,260  
                                         
Operating loss
     (395,640 )     (1,383,558 )     (1,430,237 )     (4,464,955 )     (60,534,260 )
                                         
Other (income) expense:
                                        
Equity in losses of Hedrin JV
     105,362       140,138       337,048       247,731       587,048  
Change in fair value of derivative
     (157,778 )     -       658,889       -       531,111  
Interest and other income
     (63,873 )     (148,184 )     (252,500 )     (335,613 )     (1,533,031 )
Interest expense
     136,738       18,804       396,698       18,804       487,522  
Realized gain on sale of marketable equity securities
     -       -       -       -       (76,032 )
Total other (income) expense
     20,449       10,758       1,140,135       (69,078 )     (3,382 )
                                         
Net loss
     (416,089 )     (1,394,316 )     (2,570,372 )     (4,395,877 )     (60,530,878 )
                                         
Preferred stock dividends (including imputed amounts)
     -       -       -       -       (1,179,644 )
                                         
Net loss applicable to common shares
   $ (416,089 )   $ (1,394,316 )   $ (2,570,372 )   $ (4,395,877 )   $ (61,710,522 )
                                         
Net loss per common share:
                                        
Basic and diluted
   $ (0.01 )   $ (0.02 )   $ (0.04 )   $ (0.06 )        
                                         
Weighted average shares of common stock outstanding:
                                        
Basic and diluted
     70,624,232       70,624,232       70,624,232       70,624,232          

See accompanying notes to financial statements.

 
5
 

MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statement of Stockholders' Equity (Deficiency)
(Unaudited)

   
Common
stock
shares
    
Common
stock
amount
    
Additional
paid-in
capital
    
Deficit
accumulated
during
development
stage
    
Other
    
Total
stockholders’
equity
(deficiency)
  
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 )     (56,796 )     (4,000 )     (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
     -       -       9,045,176       -       1,000       9,046,176  
Imputed preferred stock dividend
                     418,182       (418,182 )             -  
Net loss
     -       -       -       (5,960,907 )             (5,960,907 )
Balance at December 31, 2003
     23,362,396       23,362       14,289,535       (7,473,205 )     (6,760 )     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
     -       -       281,073       -       (282,363 )     (1,290 )
Conversion of preferred stock to common stock at $1.10 per share
     1,550,239       1,551       (1,380 )     -       (171 )     -  
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
     28,309,187       28,309       18,083,208       (13,955,035 )     297,334       4,453,816  
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
     -       -       477,736       -       (479,032 )     (1,296 )
Conversion of preferred stock to common stock at $1.10 per share
     8,146,858       8,147       (7,251 )     -       (896 )     -  
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  

 
6
 

MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statement of Stockholders' Equity (Deficiency)
(Unaudited)

   
Common stock
shares
    
Common stock
amount
    
Additional paid-
in capital
    
Deficit
accumulated
during
development
stage
    
Other
    
Total
stockholders’
equity
(deficiency)
  
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
     -       -       463,890       -       -       463,890  
Warrants issued with secured 12% notes
     -       -       170,128       -       -       170,128  
Net loss
     -       -       -       (4,268,858 )     -       (4,268,858 )
Balance at December 31, 2008
     70,624,232       70,624       54,821,379       (59,267,928 )     -       (4,375,925 )
                                                 
Cumulative effect of a change in accounting principle
     -       -       (150,000 )     127,778       -       (22,222 )
Balance at January 1, 2009, as adjusted
     70,624,232       70,624       54,671,379       (59,140,150 )     -       (4,398,147 )
                                                 
Share-based compensation
     -       -       271,075       -       -       271,075  
Warrants issued with secured 12% notes
     -       -       46,125       -       -       46,125  
Warrant issued to placement agent
     -       -       6,919       -       -       6,919  
Net loss
     -       -       -       (2,570,372 )     -       (2,570,372 )
Balance at September 30, 2009
     70,624,232     $ 70,624     $ 54,995,498     $ (61,710,522 )   $ -     $ (6,644,400 )
                                                 
See accompanying notes to financial statements.
                    

 
7
 

MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)

   
Nine months ended September
30,
    
Cumulative period
from August 6,
2001 (inception) to
September 30,
  
   
2009
    
2008
    
2009
  
Cash flows from operating activities:
                  
Net loss
   $ (2,570,372 )   $ (4,395,877 )   $ (60,530,878 )
Adjustments to reconcile net loss to net cash used in operating activities:
                        
Equity in losses of Hedrin JV
     337,048       247,731       587,048  
Share-based compensation
     271,075       379,060       4,099,948  
Amortization of OID and issue costs on Secured 12% Notes
     380,261       -       418,835  
Change in fair value of derivative
     658,889        -       531,111  
Shares issued in connection with in-licensing agreement
     -       -       232,500  
Warrants issued to consultant
     -       -       83,670  
Amortization of intangible assets
     -       -       145,162  
Gain on sale of marketable equity securities
     -       -       (76,032 )
Depreciation
     4,297       23,258       226,228  
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
     -       18,327       23,917  
Changes in operating assets and liabilities, net of acquisitions:
              -       -  
Decrease in restricted cash
     730,499       -       -  
Decrease/(increase) in prepaid expenses and other current assets
     (48,891 )     140,430       (28,364 )
Decrease/(increase) in other assets
     13,525       (9,119 )     (36,370 )
Increase/(decrease) in accounts payable
     (399,231 )     (574,162 )     563,278  
Increase/(decrease) in accrued expenses
     (99,752 )     646,126       233,999  
Net cash used in operating activities
     (722,652 )     (3,524,226 )     (39,342,217 )
Cash flows from investing activities:
                        
Purchase of property and equipment
     -       (8,972 )     (239,608 )
Cash paid in connection with acquisitions
     -       -       (26,031 )
Net cash provided from the purchase and sale of short-term investments
     -       -       435,938  
Proceeds from sale of license
     -       -       200,001  
Net cash (used in) provided by investing activities
     -       (8,972 )     370,300  
Cash flows from financing activities:
                        
Proceeds from the Hedrin JV agreement
     500,000       2,699,176       3,199,176  
Sale of warrant
     -       150,000       150,000  
Proceeds from sale of Secured 10% Notes
     -       70,000       -  
Repayment of Secured 10% Notes
     (70,000 )      -       -  
Proceeds from sale of Secured 12% Notes
     340,270        -       1,345,413  
Repayments of notes payable to stockholders
     -       -       (884,902 )
Proceeds related to sale of common stock, net
     -       -       25,896,262  
Proceeds from sale of preferred stock, net
     -       -       9,046,176  
Proceeds from exercise of warrants and stock options
     -       -       138,219  
Other, net
     -       -       235,214  
Net cash provided by financing activities
     770,270       2,919,176       39,125,558  
Net (decrease) increase in cash and cash equivalents
     47,618       (614,022 )     153,641  
Cash and cash equivalents at beginning of period
     106,023       649,686       -  
Cash and cash equivalents at end of period
   $ 153,641     $ 35,664     $ 153,641  


 
8
 

MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)

   
Nine months ended September 30,
    
Cumulative
period from
August 6, 2001
(inception) to
September 30,
  
   
2009
    
2008
    
2009
  
Supplemental disclosure of cash flow information:
                  
Interest paid
   $ -     $ -     $ 26,033  
Supplemental disclosure of noncash investing and financing activities:
                        
Investment in Hedrin JV
   $ 500,000     $ 250,000     $ 750,000  
Warrants issued with Secured 12% Notes
     53,044       -       223,172  
Common stock issued in satisfaction of accounts payable
     -       -       770,000  
Imputed and accrued preferred stock dividend
     -       -       1,179,644  
Conversion of preferred stock to common stock
     -       -       1,067  
Preferred stock dividends paid by issuance of shares
     -       -       759,134  
Issuance of common stock for acquisitions
     -       -       13,389,226  
Issuance of common stock in connection with in-licensing agreement
     -       -       232,500  
Marketable equity securities received in connection with sale of license
     -       -       359,907  
Warrants issued to consultant
     -       -       83,670  
Net liabilities assumed over assets acquired in business combination
     -       -       (675,416 )
Cashless exercise of warrants
     -       -       33  

See accompanying notes to financial statements.

 
9
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS

1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements of Manhattan Pharmaceuticals, Inc. (“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 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 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, 2009 or for any other interim period.  These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2008, which are included in the Company’s Annual Report on Form 10-K  for such year.  The condensed balance sheet as of December 31, 2008 has been derived from the audited financial statements included in the Form 10-K for that year.

As of September 30, 2009, 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

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 6) 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.

Financial Instruments

At December 31, 2008 and September 30, 2009, the fair value of cash and cash equivalents and accounts payable approximate their carrying values due to the short-term nature of these instruments.  At December 31, 2008, the fair values of the secured notes payable approximate their carrying values due to the recent issuance of the notes.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification.

 
10
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
In December 2007, the FASB issued a statement that requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. This statement establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. This statement was effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of this statement did not have any impact on the Company’s financial statements.
 
In February 2008, the FASB issued two Staff  Positions as well as other accounting pronouncements that address fair value measurements on lease classification. The adoption of these pronouncements did not have a material impact on the Company’s financial statements.
 
In March 2008, the FASB issued a pronouncement which requires expanded disclosures about an entity's derivative instruments and hedging activities. This pronouncement 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. This pronouncement was effective for the Company as of January 1, 2009, and its adoption did not have any impact on the Company’s financial statements.
 
In June 2008, the FASB ratified a pronouncement which provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. This statement was effective for fiscal years beginning after December 15, 2008. The adoption of this statement had a significant impact on the Company’s financial statements (see Note 10 to our financial statements for the period ended September 30, 2009).

In April 2009, the FASB issued a pronouncement which provides guidance on determining when there has been a significant decrease in the volume and level of activity for an asset or liability, when a transaction is not orderly, and how that information must be incorporated into a fair value measurement. This pronouncement also requires expanded disclosures on valuation techniques and inputs and specifies the level of aggregation required for all quantitative disclosures.  The provisions of this pronouncement were effective for the Company’s quarter ending June 30, 2009. The adoption of this pronouncement did not have any impact on the Company’s financial statements.

In April 2009, the FASB issued several pronouncements which makes the guidance on other-than-temporary impairments of debt securities more operational and requires additional disclosures when a company records an other-than-temporary impairment. These pronouncements were effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted these principles in the second quarter of 2009, which did not have any impact on the Company’s financial statements.

In April 2009, the FASB issued several statements which require companies to disclose in interim financial statements the fair value of financial instruments. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. In addition, the companies are required to disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. This statement shall be applied prospectively and was effective for interim and annual periods ending after June 15, 2009. To the extent relevant, the Company adopted the disclosure requirements of this pronouncement for the quarter ended June 30, 2009.  The adoption of these statements did not have a material impact on the Company’s financial statements.

 
11
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
In May 2009, the FASB issued a statement which sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This statement was effective for interim or annual periods ending after June 15, 2009, and the Company adopted the provisions of this statement for the quarter ended June 30, 2009. The adoption of this statement did not have a material impact on the Company’s financial statements.  The Company has evaluated all events or transactions that occurred after September 30, 2009 up through November 16, 2009, the date we issued these financial statements, and there have been no events or transactions that have a material impact on the Company’s financial statements.

In August 2009, the FASB issued a new pronouncement to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In particular, this pronouncement specifies that a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance. This statement is prospectively effective for financial statements issued for interim or annual periods ending after October 1, 2009. The adoption of this statement on December 31, 2009 will not impact the Company’s results of operations or financial condition.

2.            LIQUIDITY

The Company incurred a net loss of $2,570,372 and negative cash flows from operating activities of $722,652 for the nine month period ended September 30, 2009 and 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, 2009 amounts to $61,710,521.

The Company received approximately $1.8 million in February 2008, approximately $0.9 million in June 2008 and $0.5 million in February 2009 from a joint venture agreement.  This joint venture agreement is more fully described in Note 6.  The Company received $70,000 in Secured 10% Notes in September 2008 which was repaid in full in February 2009.  The Company received $1.0 million in November and December 2008 and $0.3 million in February 2009 from the sale of Secured 12% Notes. These notes are more fully described in Notes 7 and 8.
 
Management believes that the Company will continue to incur net losses through at least September 30, 2010 and for the foreseeable future thereafter.  Based on the resources of the Company available at September 30, 2009, management believes that the Company has sufficient capital to fund its operations through the end of 2009.  Management believes that the Company will need additional equity or debt financing or will need to generate positive cash flow from a joint venture agreement, see Note 6, or generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations into 2010.  Furthermore, the Company 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.
 
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.
 
These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
12
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
3.
COMPUTATION OF NET LOSS PER COMMON SHARE

Basic net loss per common share is calculated by dividing net loss applicable to common shares by the weighted-average number of common shares outstanding for the period.  Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from 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 were 92,184,443 and 19,500,189 shares at September 30, 2009 and 2008, respectively.  These amounts do not include the 55,555,555 shares issuable upon the exercise of the put or call rights issued in connection with the Hedrin JV (see Note 6) which were subject to anti-dilution rights upon the issuance of warrants with the Secured 12% Notes (see Note 8).

4.
SHARE-BASED COMPENSATION

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 $78,605 and $83,396 for the three month periods ended September 30, 2009 and 2008, respectively, and $271,075 and $379,060 for the nine month periods ended September 30, 2009 and 2008, respectively.  The Company did not capitalize any share-based compensation cost.

Options granted to consultants and other non-employees 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 cost of $382 and $1,151, respectively, for the three-and nine months ended September 30, 2009 and $347 and $606, respectively for the three-and nine months ended September 30, 2008. The Company has allocated share-based compensation costs to general and administrative and research and development expenses as follows:

   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
General and administrative expense:
                        
Share-based employee compensation cost
   $ 78,223     $ 64,071     $ 269,924     $ 279,476  
Share-based consultant and non-employee cost
     38       -       115       -  
      78,261       64,071       270,039       279,476  
Research and development expense:
                                
Share-based employee compensation cost
     -       18,978       -       98,978  
Share-based consultant and non-employee cost
     344       347       1,036       606  
      344       19,325       1,036       99,584  
Total share-based cost
   $ 78,605     $ 83,396     $ 271,075     $ 379,060  
 
To compute compensation expense in 2009 and 2008 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 of its common stock.  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.  The expected forfeiture rates are based on the historical employee 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.

 
13
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED 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 2009 and 2008:
 
   
Nine months ended
September 30,
  
   
2009
    
2008
  
             
Expected volatility
     94 %     92.3 %
                 
Dividend yield
     -       -  
                 
Expected term (in years)
     6       6  
                 
Risk-free interest rate
     2.08       2.81  
 
The Company has shareholder-approved incentive stock option 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 stock.  In August 2005, the Company increased the number of shares of common stock reserved for issuance under the 2003 Plan by 2,000,000 shares.  In May 2007, the Company increased the number of shares of common stock reserved for issuance under the 2003 Plan by 3,000,000 shares.  At September 30, 2009, 10,400,000 shares were authorized for issuance.  The options have a maximum term of 10 years and vest over a period determined by the Company’s Board of Directors (generally 3 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. At September 30, 2009, options to purchase 6,322,696 shares were outstanding, 27,776 shares of common stock were issued and there were 4,049,528 shares reserved for future grants under the 2003 Plan.
 
In July 1995, the Company established the 1995 Stock Option Plan (the “1995 Plan”), which provided for the granting of options to purchase up to 130,000 shares of the Company’s common stock to officers, directors, employees and consultants.  The 1995 Plan was amended several times to increase the number of shares reserved for stock option grants.  In June 2005 the 1995 Plan expired and no further options can be granted.   At September 30, 2009, options to purchase 1,137,240 shares were outstanding and no shares were reserved for future stock option grants under the 1995 Plan.

 
14
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
A summary of the status of the Company’s stock options as of September 30, 2009 and changes during the period then ended is presented below:
 
   
Shares
    
Weighted
average
exercise
price
    
Weighted
Average
Remaining
Contractual
Term (years)
    
Aggregate
Intrinsic
Value
  
Outstanding at December 31, 2008
     10,633,836     $ 0.938              
Granted
     -                      
Exercised
     -                      
Canceled
     3,007,234     $ 1.485              
Forfeited
     166,666     $ 0.950              
Outstanding at September 30, 2009
     7,459,936     $ 0.718       6.410     $  -  
                                 
Exercisable at September 30, 2009
     6,734,110     $ 0.757       6.220     $ -  
                                 
Weighted-average fair value of options granted during the nine month period ended September 30, 2009
  
None issued
                          
 
As of September 30, 2009, the total compensation cost related to nonvested option awards not yet recognized is $97,942.  The weighted average period over which it is expected to be recognized is approximately 0.5 years.
 
5.
COMMITMENTS AND CONTINGENCIES
 
Swiss Pharma

The Company had 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 approximately $646,000 which amount includes a  contract penalty of approximately $323,000, a final services invoice of approximately $48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses incurred in the arbitration process of approximately $245,000, reimbursement of arbitration costs of approximately $13,000 and interest through September 5, 2008 of approximately $17,000.  Further, the arbitrator ruled that the Company must pay interest of 5% per annum on approximately $371,000, the sum of the contract penalty of approximately $323,000 and the final services invoice of approximately $48,000, from October 12, 2007 until paid.
 
The Company had previously recognized a liability to Swiss Pharma in the amount of approximately $104,000 for the final services invoice.  The remainder of the award, approximately $542,000, was expensed in September 2008.    The Company will continue to accrue interest at 5% per annum on the approximate $371,000 until such amount has been settled.  The Company and Swiss Pharma reached a settlement subsequent to September 30, 2009 (see Note 11).

 
15
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
6.
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 $2,054,630.  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%.  The FDA classified Hedrin as a Class III medical device in February 2009.  Under the amended terms, upon attaining this classification of Hedrin by the FDA, Nordic invested an additional $1.25 million, for a total investment of $5 million, into the Hedrin JV,  the Hedrin JV paid an additional $0.5 million, for a total of $3.5 million, to the Company and the $250,000 that Nordic advanced to the Hedrin JV in June became an equity investment in the Hedrin JV by Nordic. The Hedrin JV was 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.
 
In February 2009, the Company’s exchange obligation increased by $1,000,000 and the Company’s investment in the Hedrin JV increased by $500,000 as a result of the investment by Nordic of an additional $1.25 million into the Hedrin JV, the reclassification of the advance made by Nordic in June 2008 to the Hedrin JV of $250,000 into an equity interest and the payment of $500,000 by the Hedrin JV to the Company. At September 30, 2009, the Company’s exchange obligation is $3,949,176.
 
During the nine month periods ended September 30, 2009 and 2008, the Company recognized $337,048 and $247,731, respectively, of equity in the losses of the Hedrin JV.  This reduced the carrying value of its investment in the Hedrin JV to $162,952 at September 30, 2009.  As of September 30, 2009, the Company’s share of the losses is $587,048; equity in losses of Hedrin JV previously recognized was $250,000 leaving a $337,048 share of the cumulative losses of the Hedrin JV that was recognized by the Company at September 30, 2009.
 
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 $0.09, 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.

 
16
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
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 $0.09.  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.  For the nine month periods ended September 30, 2009 and 2008, the Company has recognized $258,845 and $183,266, respectively, of other income from management fees earned from the Hedrin JV which is included in the Company’s condensed statements of operations for the nine month periods ended September 30, 2009 and 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 11.1 million shares of the Company’s common stock, as adjusted due to the 12% Notes Transaction, see Note 8, exercisable for $0.09 per share, as adjusted due to the 12% Notes Transaction, see Note 8.  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 initially 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 and has been subsequently adjusted due to the 12% Notes Transaction, see Note 8.
 
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.
 
Nordic has the right to nominate a person to serve on the Company’s Board of Directors.  Nordic has nominated a person, however, that person has declined to stand for appointment to 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.  On June 2, 2009, the Company filed an additional Registration Statement registering the additional 28,769,841 shares of Common Stock that may be issued to Nordic upon exercise of a put right held by Nordic as a result of Nordic’s additional investment of $1,250,000 in Hedrin JV pursuant to the terms of the Partnership Agreement and as adjusted pursuant to the anti-dilution provisions of the put right (the "Put Shares") and the additional 3,968,254 shares issuable upon exercise of an outstanding warrant held by Nordic.    The Securities and Exchange Commission (“SEC”) has informed the Company that the Company may not register the Put Shares for resale until Nordic exercises its put right and such shares of Common Stock are outstanding.  The Company believes that it has used commercially reasonable efforts to cause the registration statement to be declared effective and has satisfied its obligations under the registration rights agreement with respect to the registration of the Put Shares.  The Company is awaiting input from Nordic as to whether Nordic would like the Company to continue to pursue registration of the additional 3,968,254 shares issuable upon exercise of an outstanding warrant held by Nordic which were included within the June 2009 registration statement.

 
17
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
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 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 6% 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 12% 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) plus 10% per year, less the cumulative distributions received by Nordic from the Hedrin JV.  If the Hedrin JV’s assets in liquidation exceed the Nordic liquidation preference amount, then any excess shall be distributed to the Company until its distribution and the Nordic liquidation preference amount are in the same ratio as the respective equity interests in the Hedrin JV and the remainder, if any, shall be distributed to Nordic and the Company in the same ratio as the respective equity interests.  Further, in no event shall Nordic’s distribution in liquidation be greater than assets available for distribution in liquidation.

 7.           SECURED 10% NOTES PAYABLE

In September 2008, Manhattan entered into a series of Secured 10% Notes (the “Secured 10% Notes”) with certain of our directors, officers and an employee (the “Secured 10% Note Holders”) for aggregate of $70,000.   Principal and interest on the Secured 10% Notes shall be paid in cash on March 10, 2009 unless paid earlier by us.  Pursuant to the Secured 10% Notes, we also issued to the Secured 10% Note Holders 5-year warrants to purchase an aggregate of 140,000 shares of our common stock at an exercise price of $0.20 per share.  Manhattan granted to the Secured 10% 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 December 31, 2008 accrued and unpaid interest on the Secured 10% Notes amounted to $1,764 and is reflected in the accompanying balance sheet as of December 31, 2008 as a component of accrued expenses.  The Secured 10% Notes plus interest were repaid on February 4, 2009.

8.
SECURED 12% NOTES PAYABLE

On November 19, 2008, December 23, 2008 and February 3, 2009, the Company completed the first, second and final closings on a financing transaction (the “12% Notes Transaction”).  The Company sold $1,725,000 of 12% senior secured notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase 57.5 million shares of the Company’s common stock at $0.09 per share.  The warrants expire on December 31, 2013.  Net proceeds of $1.4 million were realized from the three closings.  In addition, $78,000 of issuance costs were paid outside of the closings.   Per the terms of the 12% Notes Transaction the net proceeds were paid into a deposit account  (the “Deposit Account”) and are to be paid out to the Company in monthly installments of $113,300 retroactive to October 1, 2008 and a one-time payment of $200,000.  Per the terms of the 12% Notes Transaction the monthly installments are to be used exclusively to fund the current operating expenses of the Company and the one-time payment was to be used for trade payables incurred prior to October 1, 2008.  The Company received $876,700 of such monthly installments and the one time payment of $200,000 during the nine month period ended September 30,  2009.  There was no remaining balance in the Deposit Account at September 30, 2009 as is reflected in the accompanying balance sheets as of September 30, 2009 as restricted cash.

 
18
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
National Securities Corporation (“National”) was the placement agent for the 12% Notes Transaction. National’s compensation for acting as 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, reimbursement of certain expenses 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.  The Company paid National a total of $202,000 in placement agent fees, a non-accountable expense allowance and reimbursement of certain expenses, of which $47,000 was paid during the nine month period ended September 30, 2009.  In addition, the Company issued warrants to purchase 8.6 million shares of the Company’s common stock at $0.09 per share.  These warrants were valued at $29,110 and are a component of Secured 12% notes payable issue costs.  The warrants expire on December 31, 2013.
 
The Secured 12% Notes mature two years after issuance.  Interest on the  Secured 12% Notes is compounded quarterly and payable at maturity.  At September 30, 2009, accrued and unpaid interest on the Secured 12% Notes amounted to approximately $172,000 and is reflected in the accompanying balance sheet at September 30, 2009 as interest payable on secured 12% notes payable. The Secured 12% Notes are secured by a pledge of all of the Company’s assets except for its investment in the Hedrin JV.  The asset pledge includes the cash balance in the Deposit Account.  In addition, to provide additional security for the Company’s obligations under the notes, the Company entered into a default agreement, which provides that upon an event of default under the notes, the Company shall, at the request of the holders of the notes, use reasonable commercial efforts to either (i) sell a part or all of the Company’s interests in the Hedrin joint venture or (ii) transfer all or part of the Company’s interest in the Hedrin JV to the holders of the notes, as necessary, in order to fulfill the Company’s obligations under the notes, to the extent required and to the extent permitted by the applicable Hedrin joint venture agreements.

In connection with the private placement, the Company, the placement agent and the investors entered into a registration rights agreement.  Pursuant to the registration rights agreement, we agreed to file a registration statement to register the resale of the shares of our common stock issuable upon exercise of the warrants issued to the investors in the private placement, within 20 days of the final closing date and to cause the registration statement to be declared effective within 90 days (or 120 days upon full review by the Securities and Exchange Commission). During the nine month period ended September 30, 2009 we filed the registration statement, received a comment letter from the SEC and responded to the comment letter from the SEC.  The registration statement was declared effective on April 17, 2009.

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 Nordic Put and Nordic Warrant were issued at a value of $0.14 per share and were issued with anti-dilution rights. The issuance of any securities at a value of less than $0.14 per share activates Nordic’s anti-dilution rights.  The Nordic Put and the Nordic Warrant are now exercisable at a price of $0.09 per share.  The following table shows the effect of Nordic’s anti-dilution rights.
 
   
Shares Issuable
Upon Exercise of
Nordic's Put
    
Shares Issuable
Upon Exercise of
Nordic's Warrant
    
Total Shares
Issuable Upon
Exercise of Nordic's
Put and Warrant
  
Before the 12% Notes Transaction
     35,714,287       7,142,857       42,857,144  
Antidilution shares
     19,841,269       3,968,254       23,809,523  
After the 12% Notes Transaction
      55,555,556       11,111,111       66,666,667  
 
The Company incurred a total of approximately $424,000 of costs in the issuance of the $1,725,000 of Secured 12% Notes sold in 2008.  These costs were capitalized and are being amortized over the life of the Secured 12% Notes into interest expense.  During the nine month period ended September 30, 2009, the amount amortized into interest expense was approximately $154,000.  The remaining unamortized balance of approximately $253,000 is reflected in the accompanying balance sheet as of September 30, 2009 as a non-current asset, Secured 12% Notes payable issue costs.

 
19
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
The Company recognized an original issue discount (the “OID”) of approximately $194,000 on the issuance of the Secured 12% Notes sold for the value of the warrants issued to the investors.  The OID is being amortized over the life of the Secured 12% Notes into interest expense.  During the nine month period ended September 30, 2009 the amount amortized into interest expense was approximately $69,000.  The remaining unamortized balance of approximately $117,000 has been netted against the face amount of the Secured 12% Notes in the accompanying balance sheet as of September 30, 2009.  As per the terms of the 12% Notes Transaction the Company’s officers agreed to certain modifications of their employment agreements.
 
9.
LICENSE AGREEMENTS
 
Altoderm License Agreement

On April 3, 2007, the Company entered into a license agreement for “Altoderm” (the “Altoderm Agreement”) with 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 February 2009, the Company terminated the Altoderm Agreement.  The Company has no further financial liability or commitment to T&R under the Altoderm Agreement.
 
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 February 2009, the Company terminated the Altolyn Agreement for convenience.  The Company has no further financial liability or commitment to T&R under the Altolyn Agreement.
 
IGI Agreement for PTH (1-34)
 
On April 1, 2005, as part of the acquisition of Tarpan Therapeutics, Inc., the Company acquired a Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April 14, 2004.  Under the IGI Agreement the Company received the exclusive, world-wide, royalty bearing sublicense to develop and commercialize the licensed technology for the treatment of psoriasis.
 
In May 2009, the Company terminated the IGI Agreement.  The Company has no further financial liability or commitment to IGI, Inc. under the IGI Agreement.

10.
DERIVATIVE LIABILITY
 
In April 2008, the FASB issued a pronouncement which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We evaluated whether warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective warrant agreements. We determined that the warrant issued to Nordic in April 2008 contained such provisions, thereby concluding they were not indexed to the Company’s own stock and were reclassified from equity to derivative liabilities.

 
20
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
In accordance with this pronouncement, the Company, estimated the fair value of these warrants as of January 1, 2009 to be $22,222 by recording a reduction in paid in capital of $150,000 and a decrease in deficit accumulated during the development stage of $127,778. The effect of this adjustment is recorded as a cumulative effect of change in accounting principles in our condensed statements of stockholder’s equity (deficiency).  As of September 30, 2009, the fair value of this derivative was $681,111. The change of $658,889 in fair value during the nine month period ended September 30, 2009 is reported as a non-cash charge in our condensed statement of operations as a component of other (income) expense.

11.
SUBSEQUENT EVENTS

Swiss Pharma Contract LLC Settlement
On October 27, 2009, the Company entered into a Settlement Agreement and Mutual Release with Swiss Pharma Contract LTD (“Swiss Pharma”) pursuant to which it agreed to pay Swiss Pharma $200,000 and issue Swiss Pharma an interest free promissory note in the principal amount of $250,000 in full satisfaction of the September 5, 2008 arbitration award. The amount of the Arbitration award was $683,027 at September 30, 2009 and is included as a component of accrued expenses in the accompanying balance sheet as of September 30, 2009.
 
In conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma described above, on October 28, 2009, the Company entered into a Subscription Agreement (the “Subscription Agreement”) pursuant to which it sold a 12% Original Issue Discount Senior Subordinated Convertible Debenture with a stated value of $400,000 (the “Debenture”) and a warrant (the “Warrant” and, together with the Debenture, the “Securities”) to purchase 2,222,222 shares of the Company’s common stock, par value $.001 per share (“Common Stock”) for a purchase price of $200,000.  The Debenture is convertible into shares of Common Stock at an initial conversion price of $0.09 per share, subject to adjustment, or, in the event the Company issues new securities in connection with a financing, the Debenture may be converted into such new securities at a conversion price equal to the purchase price paid by the purchasers of such new securities.  The Company may also, in its sole discretion, elect to pay interest due under the Debenture quarterly in shares of the Company’s common stock provided such shares are subject to an effective registration statement.  The Debenture is subordinated to the Company’s outstanding 12% Senior Secured Promissory Notes in the principal amount of $1,725,000.  The Warrant is exercisable at an exercise price of $0.11 per share, subject to adjustment, prior to October 28, 2014.

In connection with the issuance of the Securities, the Company issued warrants to purchase an aggregate of 222,222 shares of Common Stock at an exercise price of $0.11 per share to the placement agent and certain of its designees.

Potential Acquisition of Ariston Pharmaceuticals, Inc.
Manhattan entered into a non-binding letter of intent with Ariston Pharmaceuticals, Inc. ("Ariston") to acquire Ariston through a merger with a to-be-formed, wholly-owned subsidiary of Manhattan (such transaction, the "Ariston Merger").

Manhattan and Ariston contemplate the following, as set forth in the non-binding letter of intent:

 
¨
After the Ariston Merger, Manhattan would own 100% of the outstanding capital stock of Ariston.

 
¨
As consideration for the Ariston Merger, Manhattan would pay to the holders of Ariston capital stock, in the aggregate, shares of Manhattan common stock as follows:
 
o
at the closing of the Ariston Merger, 7,062,423 shares of Manhattan common stock (a number which represents 10% of the shares of Manhattan common stock which were issued and outstanding as of September 10, 2009, which was the date of the non-binding letter of intent); and
 
o
the right to receive additional contingent share consideration after the closing as follows:
 
¨
7,062,423 additional shares of Manhattan common stock upon acceptance by the US Food and Drug Administration (“ FDA ”) of Ariston’s filing of the first New Drug Application for Ariston's AST-726 product candidate; and

 
21
 
 
MANHATTAN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 
¨
8,828,029 additional shares of Manhattan common stock upon Ariston receiving FDA approval to market Ariston's AST-726 product candidate in the United States; and
 
¨
8,828,029 additional shares of Manhattan common stock if there is demonstration of clinical activity and safety with the AST-914 metabolite in the current National Institutes of Health study in essential tremor patients resulting in a decision by our Board of Directors, within 12 months following the closing, to further develop the product internally or to seek a corporate partnership based on the program
 
¨
Ariston would cause the holders of all outstanding Ariston convertible promissory notes to convert their notes into convertible new promissory notes to be issued by Ariston at the closing of the Ariston Merger.  The principal amount of the new notes will be equal to the lesser of the principal amount of the currently outstanding notes plus accrued and unpaid interest thereon through the date of the closing of the Ariston Merger or $15.5 million.  The new notes would have the following terms:
 
o
interest rate of 5% per annum compounding annually;
 
o
interest and principal are to be repaid from the net cash flow from AST-726 and AST 914 programs, 50% of this net cash flow will be used to repay the interest and principal. (subject to adjustment if the notes include a conversion feature and are converted.)
 
o
the holders of the new notes will have no recourse to Manhattan or any entity other than Ariston with respect to the payment of any amount under the new notes or any indebtedness which had been converted into new notes.
 
o
the new notes may include a conversion feature such that the new notes would be convertible at the option of the holder thereof into Manhattan common stock at a conversion price currently anticipated to be $.40 per share (the “ Conversion Price ”) if a sufficient number of authorized common stock is available.

At the Closing, two persons chosen by Ariston will join our Board of Directors.

 
22
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion of our results of operations and financial condition in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (the “Annual Report”) and our financial statements for the nine month period ended September 30, 2009 included elsewhere in this report.
 
We were incorporated in Delaware in 1993 under the name “Atlantic Pharmaceuticals, Inc.” and, in March 2000, we changed our name to “Atlantic Technology Ventures, Inc.”  In 2003, we completed a “reverse acquisition” of privately held “Manhattan Research Development, Inc”.  In connection with this transaction, we also changed our name to “Manhattan Pharmaceuticals, Inc.”  From an accounting perspective, the accounting acquirer is considered to be Manhattan Research Development, Inc. and accordingly, the historical financial statements are those of Manhattan Research Development, Inc.
 
During 2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was a privately held New York based biopharmaceutical company developing dermatological therapeutics.  Through the merger, we acquired Tarpan’s primary product candidate, Topical PTH (1-34) for the treatment of psoriasis.  In consideration for their shares of Tarpan’s capital stock, the stockholders of Tarpan received an aggregate of approximately 10,731,000 shares of our common stock, representing approximately 20% of our then outstanding common shares.  This transaction was accounted for as a purchase of Tarpan by the Company.
 
We are a specialty healthcare product company focused on developing and commercializing  pharmaceutical treatments for underserved patient populations.  We aim to acquire rights to these technologies by licensing or otherwise acquiring an ownership interest, funding their research and development and eventually either bringing the technologies to market or out-licensing.  In the short term we are focusing our efforts on the commercialization of the two product candidates we currently have in development:  HedrinTM, through the Hedrin JV, a novel, non-insecticide treatment of pediculitis (head lice) and a topical product for the treatment of psoriasis.  Longer term we intend to acquire and commercialize low risk, quick to market products, specifically products that could be marketed over-the-counter (“OTC”), treat everyday maladies, are simple to manufacture, and/or could be classified as medical devices by the FDA.
 
This discussion includes “forward-looking” statements that reflect our current views with respect to future events and financial performance.  We use words such as we “expect,” “anticipate,” “believe,” and “intend” and similar expressions to identify forward-looking statements.  Investors should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events, particularly those risks identified under the heading “Risk Factors” following Item 1 in the Annual Report, and should not unduly rely on these forward looking statements.

 
23
 

Results Of Operations
 
Nine-month Period ended September 30, 2009 vs 2008

   
Nine Months ended 
September 30,
    
 Increase
    
 % Increase
  
   
2009
    
2008
    
(decrease)
    
(decrease)
  
Costs and expenses: