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, 2010

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

48 Wall Street, New York, New York 10005
(Address of principal executive offices)

(212) 582-3950
(Issuer’s telephone number)

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

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 ¨   No x

As of November 8, 2010 there were 120,965,260 shares of the issuer’s common stock, $.001 par value, outstanding.

 
 
 

INDEX
 
   
Page
     
PART I
FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements:
  
     
 
Unaudited Condensed Consolidated Balance Sheets
4
     
 
Unaudited Condensed Consolidated Statements of Operations
5
     
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficiency)
6
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
8
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
10
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
39
     
Item 4.
Controls and Procedures
39
     
PART II
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
40
     
Item 1A.
Risk Factors
40
     
Item 6.
Exhibits
40
     
 
Signatures
41
 
 
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 SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Balance Sheets

   
September 30,
    
December 31,
  
    
2010
    
2009
  
     
(unaudited)
    
(See Note 1)
  
Assets
            
Current assets:
               
Cash and cash equivalents
   $ 1,075,966     $ 17,996  
Debt issue costs, current portion
     44,260       158,552  
Other current assets
     147,435       87,177  
Total current assets
     1,267,661       263,725  
                 
In-process research and development
     17,742,110       -  
Property and equipment, net
     3,741       3,541  
Debt issue costs
     -       77,026  
Other assets
     21,370       21,370  
Total assets
   $ 19,034,882     $ 365,662  
                 
Liabilities and Stockholders' Deficiency
                
Current Liabilities:
                
Notes payable, current portion, net
   $ 2,036,645     $ 1,274,062  
Accounts payable and accrued expenses
     395,817       291,175  
Interest payable, current portion
     415,256       182,193  
Derivative liability
     1,359,998       784,777  
                 
Total current liabilities
     4,207,716       2,532,207  
                 
Notes payable, noncurrent portion, net
     16,179,693       614,181  
Interest payable, noncurrent portion
     433,537       55,048  
Exchange obligation
     3,949,176       3,949,176  
Total liabilities
     24,770,122       7,150,612  
                 
Commitments and contingencies
                
                 
Stockholders’ deficiency:
                
Preferred stock, $.001 par value. Authorized 1,500,000 shares; no shares issued and outstanding at September 30, 2010 and December 31, 2009
     -       -  
Common stock, $.001 par value. Authorized 500,000,000 shares; 120,965,260 shares issued and outstanding at September 30, 2010 and 70,624,232 shares issued and outstanding on December 31, 2009
     120,966       70,624  
Contingently issuable shares
     15,890       -  
Additional paid-in capital
     55,802,925       55,077,861  
Deficit accumulated during the development stage
     (61,675,021 )     (61,933,435 )
Total stockholders’ deficiency
     (5,735,240 )     (6,784,950 )
                 
Total liabilities and stockholders' deficiency
   $ 19,034,882     $ 365,662  

See accompanying notes to condensed consolidated financial statements.

 
4
 

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

   
Three months ended
September 30,
    
Nine months ended
September 30,
    
Cumulative
period from
August 6, 2001
(inception) to
September 30,
  
   
2010
    
2009
    
2010
    
2009
    
2010
  
Revenue
   $ -     $ -     $ -     $ -     $ -  
                                         
Costs and expenses:
                                        
Research and development
     236,734       5,574       305,500       57,154       28,637,711  
General and administrative
     278,897       390,066       1,264,666       1,373,083       19,458,121  
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
     515,631       395,640       1,570,166       1,430,237       62,445,747  
                                         
Operating loss
     (515,631 )     (395,640 )     (1,570,166 )     (1,430,237 )     (62,445,747 )
                                         
Other (income) expense:
                                        
Equity in losses of Hedrin JV
     -       105,362       -       337,048       750,000  
Change in fair value of derivative liability
     (830,165 )     (157,778 )     (2,696,900 )     658,889       (2,266,830 )
Interest and other income
     (76,275 )     (63,873 )     (228,305 )     (252,500 )     (2,095,534 )
Interest expense
     349,562       136,738       937,555       396,698       1,578,955  
Loss on early extinguishment of debt
     -       -       159,070       -       159,070  
Realized gain on sale of marketable equity securities
     -       -       -       -       (76,032 )
                                         
Total other (income) expense
     (556,878 )     20,449       (1,828,580 )     1,140,135       (1,950,371 )
                                         
Net income  (loss)
     41,247       (416,089 )     258,414       (2,570,372 )     (60,495,376 )
                                         
Preferred stock dividends (including imputed amounts)
     -       -       -       -       (1,179,645 )
                                         
Net income (loss) applicable to common shares
   $ 41,247     $ (416,089 )   $ 258,414     $ (2,570,372 )   $ (61,675,021 )
                                         
Net income (loss) per common share:
                                        
Basic and diluted
   $ 0.00     $ (0.01 )   $ 0.00     $ (0.04 )        
                                         
Weighted average shares of common stock outstanding:
                                        
Basic and diluted
     120,965,244       70,624,232       108,812,838       70,624,232          

See accompanying notes to condensed consolidated financial statements.

 
5
 
 
MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders' Equity (Deficiency)
(Unaudited)
 
   
Common
stock
shares
    
Common
stock
amount
    
Additional
paid-
in  capital
    
Deficit
accumulated
during the
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
      
-
      
25
      
281,098
  
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
)
    
(6,077
)
    
4,150,405
  
                                                 
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
      
-
      
42
      
477,778
  
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. and SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders' Equity (Deficiency)
(Unaudited)

   
Common
stock
shares
    
Common
stock
amount
    
Additional
paid-in
capital
    
Deficit
accumulated
during the
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 directors at $0.72 per share in satisfaction of accounts payable
    
27,776
      
28
      
19,972
      
-
      
-
      
20,000
  
Common stock issued 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
    
-
      
-
      
353,438
      
-
      
-
      
353,438
  
Warrants issued with secured 12% notes
    
-
      
-
      
46,125
      
-
      
-
      
46,125
  
Warrant issued to placement agent - secured 12% notes
    
-
      
-
      
6,919
      
-
      
-
      
6,919
  
Net loss
    
-
      
-
      
-
      
(2,793,285
)
    
-
      
(2,793,285
)
Balance at December 31, 2009
    
70,624,232
      
70,624
      
55,077,861
      
(61,933,435
)
    
-
      
(6,784,950
)
Common stock issued at $0.07, net of expenses
    
43,278,605
      
43,279
      
2,542,207
      
-
      
-
      
2,585,486
  
Shares issued and issuable in Merger
    
7,062,423
      
7,063
      
1,468,984
      
-
      
15,890
      
1,491,937
  
Derivative liability associated with issuance of common stock at $0.07
    
-
      
-
      
(3,497,898
)
    
-
      
-
      
(3,497,898
)
Share-based compensation
    
-
      
-
      
211,771
      
-
      
-
      
211,771
  
Net income
    
-
      
-
      
-
      
258,414
      
-
      
258,414
  
Balance at September 30, 2010
    
120,965,260
    
$
120,966
    
$
55,802,925
    
$
(61,675,021
)
  
$
15,890
    
$
(5,735,240
)

See accompanying notes to condensed consolidated financial statements.

 
7
 

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

   
Nine months ended September 30,
    
Cumulative period
from August 6, 2001
(inception) to
  
   
2010
    
2009
    
September 30, 2010
  
Cash flows from operating activities:
                  
Net income/(loss)
   $ 258,414     $ (2,570,372 )   $ (60,495,376 )
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
                        
Equity in losses of Hedrin JV
     -       337,048       750,000  
Share-based compensation
     211,771       271,075       4,394,082  
Amortization of OID and issue costs on Secured 12% Notes
     288,772       380,261       872,745  
Change in fair value of derivative liability
     (2,696,900 )     658,889       (2,266,830 )
Loss on early extinguishment of debt
     159,070       -       159,070  
Shares issued in connection with in-licensing agreement
     -       -       232,500  
Amortization of intangible assets
     -       -       145,162  
Depreciation
     2,644       4,297       230,106  
Noncash portion of in-process research and development charge
     -       -       11,721,623  
Loss on impairment and disposition of intangible assets
     -       -       2,462,108  
Other
     -       -       31,555  
Changes in operating assets and liabilities, net of acquisitions:
                        
Decrease in restricted cash
     -       730,499       -  
Decrease/(increase) in prepaid expenses and other current assets
     60,612       (48,891 )     31,678  
Decrease/(increase) in other assets
     -       13,525       (36,370 )
Increase/(decrease) in accounts payable and accrued expenses
     (332,972 )     (498,983 )     49,994  
Increase in interest payable, current portion
     233,063               233,063  
Increase in interest payable, noncurrent portion
     387,156               387,156  
Net cash used in operating activities
     (1,428,370 )     (722,652 )     (41,097,734 )
Cash flows from investing activities:
                        
Purchase of property and equipment
     (2,844 )     -       (242,452 )
Cash acquired in connection with acquisitions
     519,365       -       493,334  
Net cash provided from the purchase and sale of short-term investments
     -       -       435,938  
Proceeds from sale of license
     -       -       200,001  
Net cash provided by investing activities
     516,521       -       886,821  
Cash flows from financing activities:
                        
Proceeds from the Hedrin JV agreement
     -       500,000       3,199,176  
Proceeds from sale of notes payable
     -       340,270       1,345,413  
Repayments of notes payable
     (193,667 )     (70,000 )     (887,067 )
Proceeds related to sale of common stock, net
     2,163,486       -       28,059,748  
Proceeds from sale of preferred stock, net
     -       -       9,046,176  
Proceeds from exercise of warrants and stock options and sale of warrant
     -       -       288,219  
Other, net
     -       -       235,214  
Net cash provided by financing activities
     1,969,819       770,270       41,286,879  
Net increase in cash and cash equivalents
     1,057,970       47,618       1,075,966  
Cash and cash equivalents at beginning of period
     17,996       106,023       -  
Cash and cash equivalents at end of period
   $ 1,075,966     $ 153,641     $ 1,075,966  

See accompanying notes to condensed consolidated financial statements.
 
 
8
 

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

   
Nine months ended September 30,
    
Cumulative period
from August 6, 2001
(inception) to
  
   
2010
    
2009
    
September 30, 2010
  
Supplemental disclosure of cash flow information:
                  
Interest paid
   $ 28,212     $ -     $ 59,642  
Supplemental disclosure of noncash investing and financing activities:
                        
Issuance of common stock for acquisitions
   $ 1,491,937     $ -     $ 14,881,163  
Conversion of debt to common stock and warrants
     422,000       -       422,000  
Investment in Hedrin JV
     500,000       500,000       750,000  
Warrants issued with notes payable
     -       53,044       250,562  
Note issued to settle accrued expenses
     -       -       211,900  
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 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 condensed consolidated financial statements

 
9
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(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.  (“Manhattan”) and subsidiaries (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, 2010 or for any other interim period.  These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2009, which are included in the Company’s Annual Report on Form 10-K  for such year.  The condensed balance sheet as of December 31, 2009 has been derived from the audited financial statements included in the Form 10-K for that year.

As of September 30, 2010, the Company has not generated any revenues from the development of its products and is therefore still considered to be a development stage company.

On March 8, 2010, Manhattan entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware corporation ("Ariston") and Ariston Merger Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the "Merger Sub").  Pursuant to the terms and conditions set forth in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston (the "Merger"), with Ariston being the surviving corporation of the Merger.  As a result of the Merger, Ariston became a wholly-owned subsidiary of Manhattan.  The operating results of Ariston from March 8, 2010 to September 30, 2010 are included in the accompanying condensed consolidated statements of operations.  The condensed consolidated balance sheet as of September 30, 2010 reflects the acquisition of Ariston, effective March 8, 2010, the date of the Merger.

Segment Reporting

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

Financial Instruments

At September 30, 2010 and December 31, 2009, the fair values of cash and cash equivalents, accounts payable, the convertible 5% notes payable, the ICON convertible note payable and the secured 12% notes payable approximate their carrying values.  At December 31, 2009 the fair value of the convertible 12% note does not approximate its carrying value as a portion of the fair value is reflected as a component of derivative liability. On April 8, 2010, the holder of the convertible 12% note exercised its option to convert (see Note 6).

 Equity in Joint Venture

The Company accounts for its investment in joint venture (see Note 5) using the equity method of accounting. Under the equity method, the Company records its pro-rata share of joint venture income or losses and adjusts the basis of its investment accordingly.
 
 
10
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued a new pronouncement, Improving Disclosures about Fair Value Measurements. This provision amends previous provisions that require reporting entities to make new disclosures about recurring and nonrecurring fair value measurements including the amounts of and reasons for significant transfers into and out of Level 1and Level 2 fair value measurements and separate disclosure of purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. This pronouncement was effective for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010.  The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial condition.

 In April 2010, the FASB issued a new pronouncement “Revenue Recognition – Milestone Method”. This pronouncement provides  guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate.  A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive.  The following criteria must be met for a milestone to be considered substantive.  The consideration earned by achieving the milestone should 1.  Be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone.  2, Related solely to past performance.  3.  Be reasonable relative to all deliverables and payment terms in the arrangement.  No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement.  Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.   This pronouncement is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  The adoption of this guidance does not have a material impact on our financial statements.

Ariston Merger

On March 8, 2010, Manhattan entered into the Merger Agreement by and among the Company, Ariston and Merger Sub.  Pursuant to the terms and conditions set forth in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston, with Ariston being the surviving corporation of the Merger.  As a result of the Merger, Ariston became a wholly-owned subsidiary of the Manhattan.

Under the terms of the Merger Agreement, the consideration payable by Manhattan to the stockholders and note holders of Ariston consists of the issuance of 7,062,423 shares of Manhattan’s common stock, par value $0.001 per share, ("Common Stock") at Closing (as defined in the Merger Agreement) plus the right to receive up to an additional 24,718,481 shares of Common Stock (the “Milestone Shares”) upon the achievement of certain product-related milestones described below.  In addition, the Manhattan has reserved 38,630,723 shares of its Common Stock for possible future issuance in connection with the conversion of $15.45 million of outstanding Ariston convertible promissory notes.  The noteholders will not have any recourse to Manhattan  for repayment of the notes (their sole recourse being to Ariston), but the noteholders will have the right to convert the notes into shares of the Manhattan’s  Common Stock at the rate of $0.40 per share.  Further, Manhattan  has reserved 5,000,000 shares of its Common Stock for possible future issuance in connection with the conversion of the $1.0 million outstanding Ariston convertible promissory note issued in satisfaction of a trade payable.  The noteholder will not have any recourse to Manhattan  for repayment of the note (their sole recourse being to Ariston), but the noteholder will have the right to convert the note into shares of Manhattan’s  Common Stock at the rate of $0.20 per share.

Upon the achievement of the milestones described below, Manhattan would be obligated to issue portions of the Milestone Shares to the former Ariston stockholders and noteholders:
 
·
Upon the affirmative decision of Manhattan’s  Board of Directors, provided that such decision is made prior to March 8, 2011, to further develop the AST-915, either internally or through a corporate partnership, Manhattan  would issue 8,828,029 of the Milestone Shares.
 
·
Upon the acceptance by the FDA of the Ariston’s filing of the first New Drug Application for the AST-726 product candidate, Manhattan would issue 7,062,423 of the Milestone Shares.
 
·
Upon the Company receiving FDA approval to market the AST-726 product candidate in the United States of America, Manhattan would issue 8,828,029 of the Milestone Shares.

 
11
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Certain members and former members of Manhattan’s  board of directors and principal stockholders of Manhattan owned Ariston securities.  Timothy McInerney, a director of Manhattan, owned 16,668 shares of Ariston common stock which represented less than 1% of Ariston’s outstanding common stock as of the closing of the Merger.  Neil Herskowitz, a director of Manhattan, indirectly owned convertible promissory notes of Ariston with interest and principal in the amount of $192,739.  Michael Weiser, a director of Manhattan, owned 117,342 shares of Ariston common stock, which represented approximately 2.1% of Ariston’s outstanding common stock as of the closing of the Merger.  Lindsay Rosenwald, a more than 5% beneficial owner of Manhattan common stock, in his individual capacity and indirectly through trusts and companies he controls or owned 497,911 shares of Ariston common stock, which represented approximately 8.9% of Ariston’s outstanding common stock as of the closing of the Merger and indirectly owned convertible promissory notes of Ariston in the amount of $141,438.

The Company merged with Ariston principally to add new products to our portfolio. Prior to the Merger, Ariston was a private, clinical stage specialty biopharmaceutical company based in Shrewsbury, Massachusetts that in-licensed, developed and planned to market novel therapeutics for the treatment of serious disorders of the central and peripheral nervous systems.

The Merger date fair value of the total consideration paid was $1,491,937 which consisted of 7,062,423 shares of the Company’s common stock issued upon the Merger and 15,890,452 contingently issuable shares upon Ariston’s attaining certain milestones as described above.  At the time of the Merger, the Company did not believe the attainment of the milestone for AST-915 was highly probable and, therefore, recorded no contingent consideration relative to it.  The par value of the contingently issuable common shares is reflected in the accompanying condensed consolidated balance sheets as of September 30, 2010 as a component of stockholders’ deficiency, contingently issuable shares.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Merger date:

Cash and cash equivalents
  
$
519,365
  
Other assets
    
120,870
  
Total identifiable assets
    
640,235
  
         
Accounts payable and accrued expenses
    
437,615
  
ICON convertible note payable
    
1,000,000
  
5% convertible notes payable
    
15,452,793
  
Total identifiable liabilities
    
16,890,408
  
         
Net identifiable assets (liabilities)
    
(16,250,173
)
         
In-process research and development acquired
    
17,742,110
  
         
Net assets acquired
  
$
1,491,937
  
 
 
12
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following supplemental pro forma information presents the financial results as if the acquisition of Ariston had occurred on January 1, 2009 for the quarter ended September 30, 2009 and nine month period ended September 30, 2009 and on January 1, 2010 for the quarter ended September 30, 2010 and the nine month period ended September 30, 2010.  This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2009 or January 1, 2010, nor are they indicative of future results.

Pro forma consolidated results:
   
Quarter ended September 30,
    
Nine months ended September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Revenue
   $ -     $ -     $ -     $ -  
Net income(loss)
   $ 41,247     $ (731,126 )   $ 104,411     $ (4,328,629 )
Basic and diluted earnings(loss) per share
   $ 0.01     $ (0.01 )   $ 0.00     $ (0.06 )

2.
LIQUIDITY

The Company had a net income of $258,414 and negative cash flows from operating activities of $1,428,370 for the nine month period ended September 30, 2010. The net loss applicable to common shares from date of inception, August 6, 2001, to September 30, 2010 amounts to $61,675,021.

During the nine months ended September 30, 2009 the Company received approximately $0.3 million from the final closing of the sale of Secured 12% Notes and approximately $0.5 million from a joint venture agreement.

During the nine months ended September 30, 2010, the Company received $40,000 from Ariston Pharmaceuticals, Inc. in exchange for notes in January 2010 and approximately $2.2 million from an equity financing transaction (see Note 7). In addition approximately $422,000 of notes payable and interest payable thereon was converted in this equity financing transaction.  The Company repaid the $40,000 received from Ariston in the first quarter of 2010 and the $27,000 received from Ariston in the fourth quarter of 2009 together with interest thereon prior to the Merger.

Management believes that the Company will continue to incur net losses through at least September 30, 2011 and for the foreseeable future.  Based on the resources of the Company available at September 30, 2010, management believes that the Company has sufficient capital to fund its operations through the end of 2010.  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 5, or generate revenues through licensing of its products or entering into strategic alliances to be able to sustain its operations into 2011.  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. In addition, $1,725,000 principal amount of debt plus interest thereon matures in three tranches beginning in November 2010.  The Company does not have the funds to repay this debt and is negotiating with representatives of the debt holders for either an extension of the maturity date or a conversion into of the debt into equity.  If the Company cannot reach agreement with the debt holders the Company will be in default on the debt.

In November 2010 $1,316,000 of principal and interest matures, in December 2010 $356,000 of interest and principal matures and in February 2011 $521,000 of principal and interest matures.  If the Company defaults on these debt obligations the debtholders have the right to appoint a collateral agent and have that collateral agent foreclose on the collateral.  The collateral is principally comprised of Manhattan’s investment in Ariston and the Company’s interest in the Hedrin JV.  Foreclosure on the collateral would render the Company bankrupt.  If the Company cannot reach agreement with the debtholders the Company may have to file for voluntary bankruptcy.
 
The Company does not have the financial resources necessary to conduct the pivotal trial of AST-726 and will have to raise funds for that purpose.
 
The Company’s continued operation 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.

 
13
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is calculated by dividing net income (loss)  applicable to common shares by the weighted-average number of common shares outstanding for the period.  Diluted net income (loss)  per common share is the same as basic net income (loss)  per common share for the three and nine months ended September 30, 2009, since potentially dilutive securities from stock options and stock warrants would have an antidilutive effect because the Company incurred a net loss during each of those periods.  The amounts of potentially dilutive securities excluded from the calculation were 211,559,852 and 99,159,628 shares at September 30, 2010 and 2009, respectively.  These amounts do not include the 71,428,571 shares issuable upon the exercise of the put or call rights issued in connection with the Hedrin JV (see Note 5) which were subject to anti-dilution rights upon the issuance of common shares in the 2010 equity financing transaction (see Note 7). At September 30, 2010, all of the dilutive securities are out of the money and are, therefore, excluded from the computation of diluted earnings per share for the three and nine month periods ended September 30, 2010.

4.
SHARE-BASED COMPENSATION

The Company has stockholder-approved stock incentive plans for employees, directors, officers and consultants.  Prior to January 1, 2006, the Company accounted for the employee, director and officer plans using the intrinsic value method. On January 1, 2006, the Company adopted the share-based payment method for employee options using the modified prospective transition method.  Under the modified prospective transition method, the Company recognized compensation cost for the quarters ended September 30, 2010 and 2009 which 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; and b) period compensation cost related to share-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the accounting methodology.

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 $5,630 and $78,605 for the three month periods ended September 30, 2010 and 2009 respectively, and $211,771 and $271,075 for the nine month periods ended September 30, 2010 and 2009, respectively.  The Company did not capitalize any share-based compensation cost.

 
14
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.  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 cost of $33 and $107, respectively, for the three-and nine months ended September 30, 2010 and $382 and $1,151, respectively, for the three-and nine months ended September 30, 2009.  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,
  
   
2010
    
2009
    
2010
    
2009
  
General and administrative expense:
                        
Share-based employee compensation cost
   $ 5,597     $ 78,223     $ 211,664     $ 269,924  
Share-based consultant and non-employee cost
     3       38       11       115  
      5,600       78,261       211,675       270,039  
Research and development expense:
                                
Share-based employee compensation cost
     -       -       -       -  
Share-based consultant and non-employee cost
     30       344       96       1,036  
      30       344       96       1,036  
Total share-based cost
   $ 5,630     $ 78,605     $ 211,771     $ 271,075  
 
To compute compensation charges in 2010 and 2009 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.
 
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 2010 and 2009:
 
   
Nine months ended September 30,
  
   
2010
    
2009
  
Expected volatility
     88 %     94 %
Dividend yield
     -       -  
Expected term (in years)
     5.7       6  
Risk-free interest rate
     2.46 %     2.08 %

 
15
 

MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY
(a Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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.  In November 2009, the Company increased the number of shares of common stock reserved for issuance under the 2003 plan by an additional 4,600,000 shares.  At September 30, 2010, 15,000,000 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, 2010 options to purchase 11,574,936 shares were outstanding, 27,776 shares of common stock were issued and  there were 4,524,528 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, 2010 options to purchase 1,127,240 shares were outstanding and no shares were reserved for future stock option grants under the 1995 Plan.
 
A summary of the status of the Company’s stock options as of September 30, 2010 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, 2009
     7,459,936     $ 0.718       6.160        
Granted
     4,125,000     $ 0.070       5.697        
Exercised
     -                        
Cancelled
     (10,000 )   $ 0.280